Published on Wed, Jan 11, 2012 at 19:22
Article from Money Control
Traditional plans of life insurance cos. are again fancy of the market. Agents/Advisors are pushing these products heavily in the market and the trend shows, the sale of traditional policies is increasing month by month. On the one side ULIPs commissions have come down and on the other, stock market is also under pressure, traditional plans have no competition right now. The market share of LIC has also increased compared to last year because of high sale of traditional plans. Birla Sunlife, which was the pioneer of unit-linked plans in India, also had to come out with traditional plans to sustain in the market.
Pankaaj Maalde, Head-Financial Planning, Apnapaisa.com
This article is all about traditional savings plans of life insurance Cos. Term insurance plans are not saving products, as there is no maturity benefit. Let us first understand what the features of these products are.
Endowment Plan: This is most popular saving product under which sum assured is payable either on death during the term or at maturity i.e. at the end of the term. The compounding bonus is declared every year and is added to sum assured. Bonus is non-guaranteed and depends upon profitability of insurance co. The policyholder has to select term while taking the policy itself. Endowment plan is a combination of term plan and saving plan. These plans are also available with limited premium payment term whereby you can reduce your premium paying term. Premium in such plans are much higher than term plan.
Whole Life Plan: As the plan name itself suggests these plans are for whole of life, means the maturity benefit is available only after reaching 80 or 100 years. The policyholder can choose the premium payment term to 15,20 or 25 as per his/her convenience. The death benefit is payable till age 80 or 100 as the case may be with bonus declared till date of death. These plans are not very much popular now a day, as people would like to enjoy their fund during their own lifetime and particularly after retirement.
Money Back Plan: Under these plans you get fixed % of sum assured at regular intervals say after every 3 to 5 years. The balance sum payable is paid with bonus at the time of maturity. The death benefit is also payable during the term of the plan but all the money already paid at fixed intervals (i.e survival benefits) is not deducted while paying death benefit. The reversionary bonuses, which are declared every year from the surplus of profit of the insurance co., is also included in while paying death or maturity benefit. Premium in such plan is higher than endowment plan.
Children's plan: These are also money back type plans but the fixed % of sum assured is payable after child attains the age of 18 years. The parent (Proposer) risk is also covered and in case of death or permanent total disability of parent (Proposer), future premiums are waived off and also the survival and maturity benefits are paid with bonus to the child insured. These plans are sold mainly for education need of the children's. These plans are relatively costly as risk of both parent and child is covered. Actually, child cover is not required while taking life insurance.
Recently many cos. have launched plans which are nothing but combination of either of the two plans, i.e. combination of endowment and whole life plan or combination of money back and whole life plan. The basic remains the same in these types of plan also and one should not buy these products with the understanding that it will give more benefits to you compared to individual plans. One must compare the premium rates to know the difference.
Investment decisions are with the insurance co. in all the above plans and the policyholder has no say in any investment decision in these plans. The government has prescribed limits for investment under these plans. A minimum of 85% is invested in govt. and semi govt., bonds and balance 15% is allowed to be invested in equity market. One can expect approx. 5% return from these plans. The point is whether traditional plans are investor friendly or they are agent friendly. First we have to agree that our distribution system is agents driven. In other words insurance in India is sold and not purchased. The agents will sell only those products where they will get more commission. Agents are promoting traditional plans heavily because traditional plans pay 35% commission in the 1st year and 5% renewal commission there after till the premiums are paid. Traditional plans are easy to sell compared to ULIP, as there is no market risk and sum assured and bonus declared are guaranteed.
Traditional plans are neither flexible nor will give better return in the longer run. They also offer lower insurance compared to premium paid. There is liability to pay the premium for a longer period. Traditional plans also have their own drawbacks; in case of emergency you pay interest on your withdrawals by way of loan. Any default in premium payments will lead to seizure of risk cover. There are heavy surrender charges if policy is terminated during the term. Most of the people think that there are no charges in traditional plans, but the reality is all charges including insurance cost, office expenses and commission charges are already in built in the premium. The same cannot be identified separately as they are loaded in premium and not shown separately as in case of ULIPs. The traditional insurance plans neither are insurance plans, as they offer very limited sum assured nor investment products, as they are unlikely to beat the inflation.
After removal of entry load in Mutual Fund and restriction on ULIP charges, it was difficult for financial distributors to survive. Old agents are looking for the alternative income and also new people are not taking insurance advisor profession. The fee based practice is still far away in India and to stay in the market and to earn bread and butter good agents have started selling traditional plans aggressively. This has resulted in more misselling. I am not saying that the move was wrong, but without proper distribution system no manufacturer can sell the product in the market. I also strongly believe that traditional plans are more risky and are taking away the large chunk of investor's hard earned money.
The need of the hour is to identify investor's need at the first place. Calculate cover needed by him/her depending on his standard of living and all his other financial goals. Then, with all priorities lined up, a detailed financial plan & suggestion has to be conveyed accordingly. Investor must consult paid financial planner so that they can identify the right product, which suits their financial need. Term plans are the best bet for life cover and are the least expensive plans. Traditional plans also require restructuring, as done in ULIP and ULP products. We hope IRDA will take some serious steps at earliest to protect the interest of the investors and policyholders at large.
ApnaPaisa helps Indian consumers take informed decisions like how much life insurance cover do I need? What must I look for before buying health insurance ? Which are other insurance plans ? He can be reached at: www.facebook.com/apnapaisa.com
Article from Money Control
