In this blog post, we compare the various types of life-insurance policies, along with our reasons for why we typically only recommend Term-Insurance policies for our clients.
Term Insurance
- About: Pure Life-Cover | Provide sum assured to your beneficiary in case of your death (during the term of the insurance plan)
- In case of death prior to maturity: Pay-out of sum assured
- Benefits: much lower premiums than insurance + investment options
- Types of term insurance plans: (a) Term Insurance (b) Whole life insurance (offers coverage till 100 years of age)
Term Insurance is the most relevant insurance plan
Term insurance plans, focus on providing what is the most important aspect of life insurance (providing your beneficiaries with the sum assured in case of your death). With no complex investments bundled along with this plan, it is the most cost-effective manner of life insurance. This is the primary life insurance product that we actively recommend for clients.
Endowment Plans
- About: Life-insurance plans that pay a lump-sum on maturity or on death | unlike term insurance plans, these provide the investor a lump-sum at the end of the plan period (which leads to a higher premium)
- Typical Terms: 10/15/20 years
- In case of death prior to maturity: Pay-out of sum assured + bonus
- Types of Endowment Plans: Unit-Linked (market-linked payouts) | With Profit (Payout of sum assured + bonus) | No-Profit (sum assured paid-out) | Guaranteed (guaranteed amount + bonus)
- Riders Available: Accidental Death | Critical Illness | Disability | Hospital Cash Benefit | Premium Waiver
- Taxation: Maturity amount (tax-free) | Premium Payments (80c benefits)
- Early Termination: Surrender value depends on the length of premiums paid & varies based on the insurer … Typically get between 30-75% of premium paid (depending on time contract has been in force) … Tax-deductions will be reversed if surrender within 3 years of policy starting .. Also have the option of converting to a paid-up plan (no additional premiums) if surrender value is very low
We typically do not recommend Endowment Plans
This is because of a number of clear drawbacks inherent to Endowment Plan:
Instead of Endowment Plans, we recommend that investors replicate the same via a combination of Pure Term Insurance + SIP's into Mutual Funds. This has the benefit of higher potential returns, lower costs and significantly lower forced long-term commitments.
- Low Returns: Insurance companies invest these sums in a conservative manner, typically in low-yielding investments. This leads to much lower actual returns of Endowment plans, relative to other long-term investment options.
- Unknown Maturity Value: With the exception of guaranteed plans (low yields), the bonus amount is unknown. Due to this, the actual maturity value of these plans are uncertain
- Long-term commitments with limited benefits: When you purchase an endowment plan, you make a long-term commitment (both in terms of paying premium and having your money locked-up). Life is uncertain, and if you require the money earlier this is only available with costly penalties
Instead of Endowment Plans, we recommend that investors replicate the same via a combination of Pure Term Insurance + SIP's into Mutual Funds. This has the benefit of higher potential returns, lower costs and significantly lower forced long-term commitments.
Money Back Policies
- About: Regular Income (% of sum assured) + Maturity Value (bonus + balance sum assured)
- Death Benefit/Maturity Benefit: Pay-out of sum assured + bonus
- Survival Benefit: A periodic payout (typically starts a few years from the start of the policy, and is paid every few years) that is paid as long as the insured is alive
- Typical Policy Terms: 10,15 and 20 years are the most common. However, can extend to as high as 40 or even 50 years
- Tax Benefits: Premium Paid (sec 80 c benefits … subject to premium < 10% of sum assured)
We typically do not recommend Money Back Policies
This is because of a number of clear drawbacks inherent to Money Back Policies:
Instead of Money Back Policies, we recommend that investors replicate the same via a combination of Pure Term Insurance + SIP's into Mutual Funds. This has the benefit of higher potential returns, lower costs and significantly lower forced long-term commitments.
- Low Returns: Insurance companies invest these sums in a conservative manner, typically in low-yielding investments. if you calculate the actual returns you make on money-back policies (not always an easy task), you will realise that the returns are substantially lower than what you would make on other comparable long-term investment options
- Unknown Maturity Value: With the exception of guaranteed plans (low yields), the bonus amount is unknown. Due to this, the actual maturity value of these plans are uncertain
- Long-term commitments with limited benefits: When you purchase a money-back policy, you make a long-term commitment (of having your money locked-up). Life is uncertain, and if you require the money earlier this is only available with costly penalties
Instead of Money Back Policies, we recommend that investors replicate the same via a combination of Pure Term Insurance + SIP's into Mutual Funds. This has the benefit of higher potential returns, lower costs and significantly lower forced long-term commitments.
Unit-Linked Insurance Plans (ULIPs)
- About: Insurance + Investment Product
- In case of death: pay out of the sum assured + value of units
- Investment returns: dependent of the returns of the underlying funds … The investor has an option to choose (& switch) between funds of different asset classes …
We typically do not recommend ULIP's
A ULIP is a clear example of an insurance plan, which is basically a Term Insurance + an Investment Plan (units, similar to mutual fund units). The investment plan part of the ULIP has a number of drawbacks to mutual fund units, including forced commitments, lock-ins and much lower flexibility over the specific categories & fund managers you wish to invest your money with.
At IME Capital, we are strong believers that given that both markets & life are uncertain, you should ideally avoid any locked-in products or funds with forced commitments (unless what you are seeking to invest in is not available in an open-ended structure - such as Private Equity, Pre-IPO or Real Estate funds).
Instead of ULIPs, we recommend that investors replicate a ULIP via a combination of Pure Term Insurance + SIP's into Mutual Funds. This has the benefit of higher potential returns, lower costs and no forced commitements/lock-ins.
At IME Capital, we are strong believers that given that both markets & life are uncertain, you should ideally avoid any locked-in products or funds with forced commitments (unless what you are seeking to invest in is not available in an open-ended structure - such as Private Equity, Pre-IPO or Real Estate funds).
Instead of ULIPs, we recommend that investors replicate a ULIP via a combination of Pure Term Insurance + SIP's into Mutual Funds. This has the benefit of higher potential returns, lower costs and no forced commitements/lock-ins.