Money Plants

Monday, January 23, 2006

Which policy gives you maximum cover at least cost?

There are at least 100 policies available in the market today. But all these policies can be classified under 2 broad heads:
1) Pure protection
2) Protection plus savings

Pure Protection:
What is it?
In a pure protection policy, you will pay premiums every year for a fixed term, say 10,20 or 30 years. There will be a fixed sum assured. Sum assured is the amount which is payable to the nominees in case of death of policyholder.
If the policyholder dies during the term, his nominees will get the sum assured. If he survives the entire term, he does not get anything at the end of the term. So the entire premium is his cost.

Which are the policies under this?
Term insurance policy

How much does it cost?
Illustration: For a 30 year old healthy person, the annual premium will be around Rs 2,000 for a sum assured of Rs 5 lakh.

Why is this useful?
This is the cheapest type of policy and is useful if you want to take a large insurance cover.

Protection plus savings:
What is it?
In India, people don't like the idea of paying a premium every year to get nothing at the end of the term. It just doesnt sell. That is why insurance companies have devised this category of products. Here, out of the total premium you pay, part of it will be allocated towards your sum assured and the rest will be invested in a fund. In a traditional policy, this is a debt fund and the investor has no option to choose his fund. Also, the company will share profits
generated by the fund with its policyholders. Policyholder will never know what was the actual return and what was given as bonuses.

But in a recent variation called Unit linked insurance policy, the rules are slightly different. (Explained under 'variants' below)

Which are the policies under this?
Endowment policies, Whole Life policies

How much is the cost?
Illustration: For a 30 year old healthy person, the annual premium will be around Rs 20,000 for a sum assured of Rs 5 lakh. Out of this, around Rs 2,000 will be allocated toward the sum assured and the balance Rs 18,000 will be invested in a fund that will generate profits.

What are the variants?
Moneyback policy/children's policy - In this case, you will get eriodic returns during the term of the policy

Unit linked policies - Here, the 'fund' in which your premiums will be invested will offer an option similar to mutual funds - such as debt, balanced or equity. You will have an option to choose the fund and the company will give you all the returns your fund generates after deducting administration and management charges.

Why is this useful?
If you don't require a very large cover and don't like the idea of getting nothing back at the end of the term, this could be an option for you. If you want to make investments for your child alongwith a life insurance cover, this option maybe considered.

6 Comments:

  • I am not sure if this is the right post for the question, but still have been thinking about it since I saw one of your previous post....
    I am repaying a home loan of 20L taken couple of yrs back for a term of 20 yrs. Now I would like to repay this loan in around 8-9 years from now. What kind of a investment should I make today to ensure that in <10 yrs time I would have a suitable amount somewhere to pay off the loan. What are my options??

    By Anonymous LoanTaker, at 1:35 AM  

  • You need to look at 2 things first. How much would you want to repay after 8-9 years and how much can you set aside for it now.

    You will face the following situations:
    1) Big repayment target but small current savings outflow
    2) Big repayment target and big current savings outflow

    In case of the former, you will have to adopt an aggressive investment strategy where you invest majority of your savings in equities. You can do that by investing in some good diversified equity mutual funds such as franklin india bluechip, fidelity equity fund, hdfc growth fund. You can invest in a systematic investment plan whereby you will invest a fixed sum every month. While equities are risky, over a long term they are known to give a return of around 15-18% per annum.

    In case of the latter, you can afford a reasonably conservative strategy wherein you invest part of the money in equities and part in debt. Debt instruments can be:
    1) National Savings certificates - 8% pre tax interest
    2) RBI Tax saving bonds - 8% pre tax interest
    3) Bank FDs - 6% pre tax interest

    You could also opt for balanced mutual funds schemes that have part allocation to equity and part to debt.

    Of course you could monitor the performance of your investments and decide if you need to change the mix. For instance, suppose you invest in equities and make great returns in the next 3-4 years, you can opt to transfer all that to a debt investment later.

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