Comparative Analysis Of Life Insurance Plans - Which One Should You Choose?

If you are the primary breadwinner of the family and want to secure the financial future of your dependents, then you must have a life insurance policy. For the uninitiated, a life insurance is nothing but an agreement between you and the life insurance company, where you agree to pay an annual premium for a set period, and in return the insurer agrees to pay you a lump sum amount (‘life cover’) to your family, in case of your death within the policy period. Life insurance primarily serves as an income replacement after your death for the people who are economically dependent on you. 

There are three main types of Life Insurance policies available today:-

1. ULIPs

Let us take a look at each one of them and see which one should you opt for:-

1. Unit Linked Insurance Plan (ULIP) 

Unit Linked Insurance Plans or ULIP is a life insurance product that combines insurance with investment, something that you should be wary of. In a ULIP, a small chunk of your annual payment goes towards providing you insurance and the remaining gets invested in a stock or bond fund (much like a Mutual Fund). You have very limited choice in the investment schemes available and there is a lock-in period of 5 years. So if their funds are not doing well, you are stuck.  

Also, apart from the fund fees, the ULIP provider also levies miscellaneous charges that can easily account for 3-5% of your investment every year! These charges decrease the returns one gets from ULIP substantially and that too with high-risk exposure to stock markets. Also, since a major share of the money goes towards investment, an annual premium of say Rs 20,000 will only fetch you a small life cover of say 5 lakh, whereas any decent life cover should be around 10-15 times your annual income. So to get a life cover of Rs 1 Crore, you will need to have an annual premium of around Rs 4 lakhs out of which the insurance premium part would be hardly Rs 15,000-Rs 20,000! Clearly, opting for a ULIP for your investment or insurance needs does not look like a very good idea.

2. Endowment Plans or Money Back Insurance Policy

Endowment plans are investment-cum-insurance product. This used to be a very popular option and knowingly or unknowingly a vast majority of people end up buying them- thanks to hard selling by agents. More often than not the agent is someone from the neighbourhood or a pushy relative who is difficult to say no to. These policies are pedaled hard by agents as they receive attractive commissions.   They appear to be simple, transparent and promise guaranteed returns in the form of sum assured.  However, this type of insurance is the least useful and  the one with the most amount of mis-selling.

First, they come with a lock-in period of 10-20 years. So if you want to withdraw your money in between, you will get much less than even what you have deposited so far (forget the gains). Second, more than 95% of the annual premium goes for investment rather than insurance, just like ULIPS. Third, contrary to what is advertised, there is zero transparency, and this lack of transparency means the insurer can deduct any fees from your investment returns, leaving you with no choice or control over your own money. You usually wouldn’t even know how much your policy is worth in any year. Also, they do not offer guaranteed returns no matter how much your insurance agent stresses this fact (ask your agent to point it out in the T&C). Finally, at the end of 10-20 years of lock-in, you will be in for a rude shock to see the final returns less than that of an FD. Needless to say, they are one of the worst options to put your hard earned money into. 

3. Term Plans

A term plan is the simplest of all the three life insurance types. It is an insurance only scheme - just like your car insurance. There is no money back here since your entire premium is used towards insurance and there is no investment component. Hence it is way cheaper than ULIPS and endowment plans - you can get a life cover of up to Rs 1 crore just by paying a premium of Rs 10,000 yearly.

So which one should you choose?

It is always advisable to keep insurance with investments separate and not mix them. Insurance is an expense, not an investment and should be treated like one. Mixing the two will give you unsatisfactory results from both - inadequate protection and low returns. If you have financial dependents, a wise move would be to buy term insurance with adequate cover (at least 1-15 times your annual income)  and invest the rest of the amount in diversified equity funds. In case you have a lower risk profile, you can split your money between Equity Mutual Funds and FDs/Debt Mutual Funds. The long term returns would still be more than ULIPS and Endowment plans. 

The author is the CoFounder and CIO at Goalwise