TRADITIONAL PLANS
1. What are the life insurance plans on offer?
· There are 3 types of life insurance plans:
o Traditional plans
o Unit-linked insurance plans
o Pension plans
2. What are traditional plans?
· They invest largely in debt products, and are less transparent than unit-linked transparent plans which invest largely in equity products.
· These are of 2 types:
o Pure insurance plans offering death benefits
o Investment-cum-insurance plans offering survival benefits at the end of the policy.
· Both types of life insurance policies have several extensions, variants and riders attached to them, which enhance the scope of insurance cover in a single policy.
A. Pure insurance plans offering death benefits
1. Term life insurance
o In its purest form, life insurance is a contract where a policyholder’s dependents get compensated if he dies during the tenure of the contract, called the policy term, and is called a ‘term cover’.
o It is the cheapest and simplest form of life insurance and is the best bet if the primary goal is to cover the life risk factors affecting your family, as it offers protection at the lowest cost.
o It does not have any savings or profit component, hence no money is returned.
o While opting for it, you need to choose the sum assured (the amount of cover you want the policy to pay) and the term (the period for which you want the cover).
o Then your insurer charges you a premium to cover your life risk for this term.
o Over that term, the policy accumulates no cash value, i.e., it does not have any savings element but buys protection only in the event of death.
o Upon surviving the term, there is no benefit paid back to the insurance holder.
o Upon death, the sum assured is paid to the nominee and the plan ends.
2. Whole life insurance
o It offers financial protection against death throughout the life of the insured person, irrespective of when it happens.
o The policyholder pays regular premiums till he dies, after which the money is handed over to the dependants.
o The savings can be under a traditional ‘with profits’ platform where most of the money is in bonds and surplus is distributed in the form of ‘bonus’.
o The sum assured plus all bonus to date is paid to the nominee in a lump sum upon death.
o As the insurance risk is spread over long-term, whole-life plans is the second cheapest insurance policy after term plans.
o On maturity, the insured can either terminate his policy and receive the maturity benefits, i.e. the sum assured and bonuses, or continue the cover for the rest of his life without paying any premium.
o However, the policy fails to address the additional needs of the insured during post-retirement years, although premiums have to be continued to be paid.
1. Endowment policies
o They have a twin-purpose nature – in addition to life cover, they also offer a return on the premiums paid through the tenure.
o They have a savings component, where only part of the premium goes towards buying insurance and the rest goes to create a corpus known as ‘endowment’, which is returned on maturity of the policy.
o The savings can be under a traditional ‘with profits’ platform where most of the money is in bonds and surplus is distributed in the form of ‘bonus’.
o In case of unexpected demise of the insured person, the beneficiary gets the sum assured plus the bonuses.
o Upon survival of the policy holder, the accumulated amount along with bonus is paid at a desired age.
2. Money back policies
o They also have a twin-purpose nature – in addition to life cover, they also offer a return on the premiums paid through the tenure.
o They are a variant of the endowment plan, and make periodic payments to policy holders to meet their future goals, instead of a single payment at the end of the tenure.
o In case of unexpected demise of the insured person, the beneficiary gets the sum assured and bonus additions, with or without deducting the payouts, depending on the plan.
a. In both these policies, since the return is paid out of the profits earned by the insurer, it will depend on the performance of the insurer’s investment portfolio and can vary from year to year.
b. The investment risk is borne by the insurer, and these plans are ideal for persons who are not market savvy and do not wish to take investment risks.
c. Since both these policies invest largely in bonds, average returns are very low.