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Yogi Zone

Useful articles for your finance management by our team of experts

Buying life insurance – Points to ponder

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Insurance planning is a must for investors who care about their dependants. Proper insurance planning ensures protection for dependants in crisis situation. There are different types of insurance products available in market covering different kinds of risk. Our focus will be on traditional life insurance products which can be divided into pure risk insurance / savings linked insurance like term plans, whole life plans, endowment plans and annuities. In this article, we will discuss the positive and negative features of insurance plans which one should consider before purchasing a plan.

Term insurance

Term insurance belongs to the category of pure risk cover product. Benefits are paid to the beneficiary if the policy holder dies during the policy term. If the policyholder survives the term, no benefits are paid either to the policy holder or the beneficiary.

The Good

The Bad

It’s very cheap.You get large cover at very low premium (Cover of 50 Lakh costs around 12000 per year)

No Benefit if the policy holder survives the term. All the money paid as premium is lost.

This is most basic form of insurance and recommended for everyone with dependents. This product is not marketed properly by financial advisors as the commission is pretty low. Condition of no benefits on term survival also acts a deterrent but insurance in its essence is meant for crisis situation.

Whole Life Assurance Plans

Whole life assurance plans provide cover for the whole life of the policyholder. It comes in two flavours – participating and non-participating. In participating whole life policy, the policy earns a part in the ‘profits’ of the insurance company and in non-participating policy, policy doesn’t participate in the ‘profits’ of the insurance company.

The Good

The Bad

1. Policy term is for whole life
2. A corpus is created at the end which helps the beneficiary
3. Tax benefits on payments

1. Policy holder doesn’t get anything
2. It’s expensive as premiums are high
3. Policy terms are complex which aid advisors in misrepresenting the facts

4. Rate of return in the policy may not be competitive with other savings products

It’s recommended to choose this insurance above term insurance only if your risk appetite is very low and you do not have enough time and knowledge for exploring other investment options.

Endowment Insurance

Endowment plans have features of both term and whole life assurance plans. These are level premium plans and at maturity, a lump sum equal to the sum assured plus bonus is paid out. In case of death during policy term, the total amount of insurance and bonus are paid to the beneficiary.

The Good

The Bad

1. Beneficial for the policyholder in case of survival
2. Beneficiary gets the corpus in case of policy holder’s death
3. Better for retirement planning for risk-averse investors
4. Tax benefits on payments

1. Rate of return in the policy may not be competitive with other savings products
2. It’s expensive as premiums are high
3. A lot of products are available in this category leading to confusion and misrepresentation by advisors

It’s recommended to choose this insurance above term insurance only if your risk appetite is very low and you do not have enough time and knowledge for exploring other investment options.

Annuities

Annuities are also known as Retirement Plans or Pension Plans. Through annuities, an individual pays premiums till he retires and then receives a regular monthly payment from the accumulated corpus post retirement.

The Good

The Bad

1. Good product for retirement planning for risk-averse investors
2. Ensures regular income post retirement
3. Withdrawal facility for accumulated amount in case of emergency

1. Rate of return in the policy may not be competitive with other savings products
2. Withdrawals in early years are costly
3. Policy surrender terms are pretty stringent

If you are seriously thinking about retirement planning, you should explore this option.

Word of Caution

There are tons of insurance products available in the market and I have only discussed the most generic ones in this article. Investors are advised to use their own judgement while choosing various insurance products. It’s recommended to consult trustworthy advisors so as to analyse the suitability of product before making investment decision.

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