Understanding the difference between Term Insurance, ULIPs & Endowment plans
It is amazing how people are so financially savvy in their investments but careless about their insurance. Some are clueless about what they are buying into with life insurance be it ULIPs or term insurance or money back/endowment plans. When buying life insurance, people only consider the sum assured, the periodic premium and the tenure of the policy. “Krishnan bought that insurance scheme for Shweta 5 years back, I think we should also look at that for Anita”. Most of them choose life insurance policies according to the perception of key influencers (family, friends and colleagues).
So, I first asked Anita’s father on what his objective was with respect to taking out the policy. Pat came the answer “I have to be prepared for what she wants to do in life, her education, her marriage… Life is uncertain with this COVID nonsense going around. I can’t be careless and let things slide. What if something happens to me or Kiran tomorrow? Who will take care of Anita?”
That is when I realized that awareness and education about insurance products is very low in India.
ULIPs (Unit linked insurance plans)
ULIPs give you the triple advantage of insurance, wealth creation and tax-saving investment. In ULIPs the money that you pay as premium is partly invested on funds and partly on risk cover. Some ULIPs even allow you to choose the funds to invest depending upon your risk appetite and investment horizon. But understand the entry load costs, the costs involved in managing the funds and the cost of insurance. These are the 3 variables which determine how much you will get in returns.
Endowment plans, ULIPs and term plans all guarantee you the death benefit or sum assured. Some endowment plans assure you returns based on the type of product. At the same time, returns on ULIPs are not assured or guaranteed. They are volatile but can give high returns over a long term because they are based on market performance of the fund. Also, with ULIPs, you have the flexibility of switching funds and tweaking your investment strategy with minimal hassle.
But what is important is to understand the entry load costs, costs involved in managing the funds and the cost of insurance. Sometimes it may be better to just take a pure term policy and invest the balance amount directly in equity mutual funds for better returns. So please check these before you commit to ULIPs — Mimi Partha Sarathy
Endowment Plans
Endowment plans are among the most popular life insurance products in India because it combines the twin benefits of investment and life cover like unit linked insurance plans (ULIP). However, it differs from a ULIP in several ways When you invest in an endowment plan, you are getting life coverage as well as saving money for your retirement, children’s education and marriage, or a house, many times with a fixed return. The policyholder’s family or nominee gets the sum assured amount on death of the policyholder. In case the policyholder survives the policy term, he gets the maturity amount plus any bonus accrued on the endowment plan.
Endowment plans give you financial protection of family against the policyholder’s sudden demise or permanent disability. They allow for savings based on important life goals such as retirement, house purchase, children’s marriage and education, etc.
But returns of Endowment policies are usually very low because of the fixed returns with a high premium amount which has to be paid every year. So this is more useful for those who may not have a large asset base as this is a good forced saving for major goals. Please check the returns and your financial goals before committing large sums every year for long period in endowment plans — Mimi Partha Sarathy
Some other financial benefits also include tax exemption under section 80C and 10(10D) and you can get a loan against the policy in the event of any financial emergency
Term life insurance
This is one of the simplest and most cost-effective life insurance products. It provides life coverage for a specified tenure and if the policyholder dies, the sum assured is paid to the nominee in lump sum or as monthly pay-outs. Term insurance benefits from maximum coverage at the smallest premium amount amongst the three available options. The proceeds of a term insurance policy can be used to repay any debts you may have run up, pay for funeral costs, compensate for education costs for your kids and replace future income that your family would still need to lead a comfortable life.
Compared to a ULIP plan or endowment policy, a term insurance can provide your family more financial protection The amounts are small and one can commit to small amounts for a longer period. However, it does not have the savings or wealth creation advantages of a ULIP or endowment policy.
But, many times separating the two are more beneficial for you. You can cover your insurance needs by buying a pure term cover and your investment plan can include bonds, FDs and equity mutual funds which will give you better returns ~ Mimi Partha Sarathy
Have you worked out your family’s financial needs, for the period after you? Is your family covered for all eventualities? Do you need help in understanding how to get insurance to give you peace of mind instead of just a tax benefit? Which of the three options work best for you according to your life stage? Reach out to us at mimi@sinhasi.com for discussions with our financial advisors to get the best bang for buck even in insurance.
