Life Insurance: Term, ULIP, or Endowment?

12 Oct 2019 Read 149 Views

Do you know that 19 people die every minute in India? The health standards are decreasing day by day. The newspaper is filled with articles of alarmingly high pollution levels, natural calamities, increasing crime, etc. Life expectancy has come down to 68 years. In such a situation, taking Life Insurance is a must. It at least provides financial security to the family. So an obvious next question would be, "Which Life Insurance to take?”

Term, Endowment, or ULIP? The market is filled with agents that misguide people just to fill their own pockets. Their advice is purely commission-based.

So, to make a correct decision it is important for you to know them all.

Term Plan

Term assurance is just like planting a tree that gives shade to your family. There is only death benefit but no maturity benefit. The premium is much lower than that of other types of policy for the same life cover. If a person aged 25, having a term plan of 35 years dies before attaining the age of 60 years. Then only he will get the benefits otherwise not.

Endowment Plan

This plan is like planting a fruit tree that provides both fruits as well as shade. There are both maturity benefits as well as death benefit available, making it highly secure. If a person aged 25 takes an endowment plan of 35 years, no matter he dies before attaining the age of 60 years or survives, he will get the benefits. But things are not that attractive as they look so. The premium paid for this policy is very high, and at max, you can get a 7% rate of return. This is not much more than the inflation rate. So in reality there is no such benefit.

Unit Linked Insurance Plan (ULIP)

This is a combination of both investment and insurance. The returns associated are high, but so is the risk. Money is invested in the capital market (equity and debts). This is like growing a cash crop, so if weather conditions are favorable, you will be able to reap the benefits; otherwise, your investment is in danger. The minimum lock-in term for this policy is 5 years. Generally, life cover received is 10 times of the annual premium paid.

What to prefer?

A general principle states that life cover should be 15-20 times the annual income of a person. Let's have a look at an example to understand things clearly. Ram is a person aged 30 years, earning six lakhs per annum looking for a plan for life insurance. The minimum life cover needed by him becomes 90 lakhs (15 times*6 lakhs/annum=90 lakhs). Let's discover the approximate premium of the three policies.

POLICY TYPE

ANNUAL PREMIUM

MONTHLY PREMIUM

TERM

PAYOUT

ENDOWMENT PLAN

1,80,000

15,000

40 YEARS

1 Crore

TERM PLAN

10,800

900

40 YEARS

1 Crore

ULIP

3,60,000

30,000

30 YEARS

1.5 Crore

From the above data, we can conclude that the term plan is the best option. It will be useless to take ULIP or endowment as the premiums are too high.

A Glimpse

Features

Term

Endowment

Ulip

Premium

Very Low

Very High

Very High

Guaranteed cash value

No

Yes

Yes

Investment Feature

No

Yes

Yes

Liquidity

No

High

Moderate ( lock-in )

Risk associated

Not an investment

No risk

High Risk

Rate of Return

Not an investment

Low

High


Conclusion

Life Insurance and Investment are two different things and they should be treated as separate. ULIP gives both benefits, but neither the cover is enough, nor the returns are impressive. The best possible way is to take a term plan for your life cover and invest the surplus savings in mutual funds and stocks.  Death will happen one day, so instead of running away, we should plan for our family. Yes, the emotional loss cannot be covered, but the financial loss can be. So Invest wisely!

About the Author: Abhimanyu Gupta | 4 Posts

Abhimanyu Gupta is an ambitious individual. Completing his graduation in commerce from Delhi University, he holds a deep interest in Insurance and Finance. When he is not glued to the computer screen, he loves to sing and play the piano.

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