Which Insurance Policy to Purchase - Traditional Life Insurance or ULIPs?

Some of the questions you would generally ask before making a insurance purchase decision are - What are traditional life insurance plans? Why should I buy a traditional plan? How will I benefit from it? And how is it relevant in today’s environment? How are these different from the more popular ULIPs? Traditional insurance plans include term, endowment and whole life policies. They offer multiple benefits in terms of risk cover, return, safety and tax benefit. Traditional policies are considered risk-free, as they provide fixed income returns in case of death or maturity of the policy.

Here are some of the reasons why traditional life insurance plans are the answer to the apprehensions and challenges faced by consumers and the Life Insurance industry.

1. The interest of the company and the customer are aligned: In participating products, the life insurance company can make margins only when the customer makes margins and to that extent the interest of the company and the customer are aligned. As per the insurance law, the company can retain only 1/10th of the profits with 9/10th of the profits shared with the customers. This is known as the “90/10” rule in the industry. Put simply if the company makes Rs. 100 as profits, Rs. 90 has to be given to the customer first.

2. Investment risk is managed better in Traditional products: In Unit Linked products the investment risk lies with the customer. But most customers do not fully appreciate the risks involved in such products. In traditional participating products, the investments are managed by the company in a prudent manner. This works out to the advantage of a passive investor as there are investment guarantees built into the product design. Not only are investments done in a more conservative manner, the dividends are also 'smoothed' and declared in a steady fashion.

3. Traditional Insurance is closer to Protection: Right from the sale when the premium is a function of the sum assured to the bonus declaration which also adds to increased growth of protection component within the policy, traditional insurance is closer to protection than ULIPs wherein protection element of the policy, in most cases is more or less constant or subject to vagaries of the market and fund value.

4. The chances of mis-selling are much lower: Traditional participating plans offer in-built guaranteed benefits. Hence the 'give and get' equation is fairly simple to comprehend which significantly reduces the risk of mis-selling. Unlike ULIPs, these products are sum assured based and not market linked products leaving much less scope for speculative selling and buying behaviour.

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In a nut shell

World over Traditional Par Insurance is much more popular than ULIPs and its variants. Customers in western markets who have seen market swings empty out retirement funds have come to appreciate the 'risk-return spectrum' of insurance plans as well as the difference between investment and savings.

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Traditional plans provide the dual advantage of guaranteed returns and protection for long term savings to consumers. This is why traditional participating products are recognized as ideal vehicles for long term savings and protection, even in the Indian context.

Source-Medindia