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Articles 1559 views January 18, 2019
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Investments and insurance need not be exclusive to each other. While both are important, many people believe that having enough assets in hand will guarantee a secure future to their loved ones. While regular investments must be made to avail the benefits of returns and, thereby, increase income levels, having a cover that makes up for the loss of income in the event of sudden death is also important.
The idea of buying term insurance stemmed from the need to financially secure the future of loved ones. With so many life insurance companies in India selling term insurance plans and other similar insurance products under different names, customers can choose as per their need and budgetary requirements. Investment options including bank deposits, fixed deposits, mutual funds, etc. help to increase income though there is no separate allocation for security. This explains the increasing importance of Unit Linked Insurance Plans (ULIPs) that offer market-linked returns in addition to securing the much-needed insurance cover.
As the name suggests, ULIPs combine the essence and importance of both investment and insurance. In ULIPs, a portion of the premium is allocated towards mortality charges. The leftover portion is allocated to investments, thus, allowing policyholders to enjoy the benefits of both insurance and investment. Insurance companies depending on their outlook and financial goals may invest the amount earned from premiums in monetary options like equity stocks, debt instruments, balanced or hybrid funds and others. This means that policyholders not only get to earn from their investments in ULIPs but are also ensured an insurance cover that acts to secure their loved ones in the event of their sudden death. However, premium charges of ULIPs are high considering that the company is ensuring its customers the dual advantage of investment and insurance.
Investments in ULIPs allow policyholders to invest as per their choice. This means that interested customers can make a choice of their ULIPs as per their convenience, risk appetite and financial commitments.
Switching of funds is another benefit that policyholders buying ULIPs can avail of. Depending on the risk profile, policyholders can choose between different funds in which they can put their money. Most insurance companies give their customers the option to choose from six to eight funds. Returns from ULIPs may range from high to moderate depending on the kinds of funds chosen in addition to market performance. In the event of an adverse market scenario, policyholders can transfer the accumulated earnings from one fund to the other as a way of hedging their returns from tumultuous market movements.
The premium charges in ULIPs are higher than term insurance policies considering that policyholders also have to pay for mortality charges towards the insurance cover. Policyholders must consider buying ULIPs only when they are seeking an insurance cover in addition to earning returns in the long run. The policyholders may choose the tenure of ULIPs depending on their needs, though a higher tenure of 10-15 years is advisable to earn good returns.
Policyholders who have paid for ULIPs often question the sanity behind buying term insurance plans despite having secured their nominees’ future through ULIPs. A look at the insurance cover gained through ULIPs clearly indicates how ULIPs may not promise the right amount of death benefits that policyholders would like to set aside. This is because a major portion of the premiums charged on ULIPs is invested in the market, leaving behind a very small amount for life insurance companies in India to promise an adequate insurance cover.
Term insurance plans, on the other hand, promise a greater amount of sum assured in lieu of nominal premium charges. The minimum sum assured is Rs 25 lakhs while the maximum amount can extend to crores of rupees. This makes term insurance a much more viable option for those interested to financially secure their loved ones. Since the investment is not linked to the market, policyholders are assured that their choice of sum assured will be handed over to the nominees in the event of their sudden death. Some term insurance plans also come with a “Return of Premiums” option, which means that the policyholders can have back the total amount of premiums they had paid if they outlive the policy period.
Term insurance is a “pure insurance” cover that must be bought only with the idea to ensure security as opposed to looking at it from an investment point of view. The policy period is usually more for term insurance as policyholders want to ensure that their nominee(s) get the sum assured in the event of their sudden death.
Both ULIPs and term insurance plans are sold by life insurance companies. Customers must assess their needs to identify what suits them and pay for the one that is in sync with their needs and budget.
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