Is it a good idea to mix insurance with investment?
>> Tuesday, June 28, 2011
As the debate between choosing pure protection and endowment plans continue, we look at whether it makes sense to select an insurance plan with the objective of savings.
The insurance sector in India is growing at a fast clip. However, policyholders often get confused between the concepts of ‘insurance’ and ‘investment’ and cannot differentiate between pure protection or endowment life insurance. Some insights into the different facets of both these instruments should be helpful.
Term insurance or pure protection plans: A term insurance policy offers protection for a pre-determined premium. Generally, the premium is low and quite affordable, but does not have a built-in savings component. It provides coverage for a specific time period. However, the most important benefit of a term policy is that it offers a guaranteed death benefit at a considerable low cost.
Term plans are beneficial when protection needs are high at certain phases in life. For instance, when your family is growing and may be you do not have sufficient funds to pay a large premium.
However, term insurance policy has no cash value, or savings component, and the premiums tend to increase through the years.
The policy provides benefit only upon the death of the insured. In the absence of an eventuality, the premium is not refunded.
Endowment plans: Endowment life insurance plans offer both protection and savings opportunity. Generally, this is chosen to avail of fixed and market-linked variable returns. Hence, the important benefit of a endowment life insurance policy is the cash value benefit. The Indian consumer prefers bundled products to pure protection plans due to a preference for returns from all financial instruments. As per ‘Life 2010’, a study
done by AC Nielsen, 67 per cent respondents bought life insurance to get good returns from it.
Most endowment policies are also eligible for dividends, which are not guaranteed, if and when they are declared by the insurance company. Many companies offer the option to apply current and accumulated dividend values towards payment of all or part of the premiums. If dividend values are sufficient, out-of-pocket premium payments may end or be reduced after several years, yet coverage can continue for life.
So while premiums must be paid under both the term and endowment plans, long-term out-of-pocket cost of permanent life insurance may be lower compared to the total cost for a term policy.
Additionally endowment policies can also eliminate the problem of future insurability.
Cash value life insurance does not expire after a certain period of time. For example, whole life policies which allow for increasing protection through paid up additions thus matching the lifestyle needs of the policyholder.
Also, some policies contain guaranteed purchase options, which allow you to buy additional coverage at specified times and thus it builds cash value.
This amount, part of which is guaranteed under many policies, can be used in the future for any purpose you wish. If you like, you can borrow cash value for a down payment on a home, to help pay for your children’s education or to provide income for your retirement.
Most often, life insurance policy inculcates systematic and disciplined savings behaviour among the consumers to achieve their long term goals unlike any other financial instrument.
To conclude, be it a term or endowment insurance plan, choose a policy according to your objective and which accommodates the premiums and benefits to suit your budget.
(V Viswanand is the
director and head of
products and persistency management in Max New York Life Insurance)
The insurance sector in India is growing at a fast clip. However, policyholders often get confused between the concepts of ‘insurance’ and ‘investment’ and cannot differentiate between pure protection or endowment life insurance. Some insights into the different facets of both these instruments should be helpful.
Term insurance or pure protection plans: A term insurance policy offers protection for a pre-determined premium. Generally, the premium is low and quite affordable, but does not have a built-in savings component. It provides coverage for a specific time period. However, the most important benefit of a term policy is that it offers a guaranteed death benefit at a considerable low cost.
Term plans are beneficial when protection needs are high at certain phases in life. For instance, when your family is growing and may be you do not have sufficient funds to pay a large premium.
However, term insurance policy has no cash value, or savings component, and the premiums tend to increase through the years.
The policy provides benefit only upon the death of the insured. In the absence of an eventuality, the premium is not refunded.
Endowment plans: Endowment life insurance plans offer both protection and savings opportunity. Generally, this is chosen to avail of fixed and market-linked variable returns. Hence, the important benefit of a endowment life insurance policy is the cash value benefit. The Indian consumer prefers bundled products to pure protection plans due to a preference for returns from all financial instruments. As per ‘Life 2010’, a study
done by AC Nielsen, 67 per cent respondents bought life insurance to get good returns from it.
Most endowment policies are also eligible for dividends, which are not guaranteed, if and when they are declared by the insurance company. Many companies offer the option to apply current and accumulated dividend values towards payment of all or part of the premiums. If dividend values are sufficient, out-of-pocket premium payments may end or be reduced after several years, yet coverage can continue for life.
So while premiums must be paid under both the term and endowment plans, long-term out-of-pocket cost of permanent life insurance may be lower compared to the total cost for a term policy.
Additionally endowment policies can also eliminate the problem of future insurability.
Cash value life insurance does not expire after a certain period of time. For example, whole life policies which allow for increasing protection through paid up additions thus matching the lifestyle needs of the policyholder.
Also, some policies contain guaranteed purchase options, which allow you to buy additional coverage at specified times and thus it builds cash value.
This amount, part of which is guaranteed under many policies, can be used in the future for any purpose you wish. If you like, you can borrow cash value for a down payment on a home, to help pay for your children’s education or to provide income for your retirement.
Most often, life insurance policy inculcates systematic and disciplined savings behaviour among the consumers to achieve their long term goals unlike any other financial instrument.
To conclude, be it a term or endowment insurance plan, choose a policy according to your objective and which accommodates the premiums and benefits to suit your budget.
(V Viswanand is the
director and head of
products and persistency management in Max New York Life Insurance)
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