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Life Insurance : Think twice before you purchase your insurance plan

Most of us tend to buy insurance because we need a tax saving instrument and some agent happen to contact us at this moment. Life Insurance should be bought only if the insured has dependents who would be financially affected in case of sudden demise of the insured. Moreover one should check different kinds of insurance options and then weigh them against his requirements and accordingly choose the one most suited to him.

Term Insurance

This is the only pure insurance product available in the market. It secures the immediate financial needs of the family members in case of sudden demise of the policyholder. The insurer doesn't get anything on maturity in case he survives the full term while the sum assured is given to the nominee in case of causality within the term. Since it only takes care of life insurance, it attracts lowest premium.

Endowment Plan

In an endowment plan,unlike Term Insurance the policyholder gets the sum assured even if he survives the entire policy term. In addition he gets a bonus/profit for the number of years policy continued both in case of death within the term and otherwise. But obviously it charges high premium for taking care of these additional benefits.Thus a part of the premium paid by the insurer goes in providing him a life cover and another part goes in getting him the investment and rest goes for meeting the administrative expenses of the company.

Money Back Policy

Money Back Policy is an extension of Endowment Plan. In this plan a part of the sum assured is paid regularly within the policy term. In case of survival of the policyholder throughout the term the balance amount is paid at the time of maturity. But in case of death, the entire sum assured irrespective of the earlier payouts is paid. Moreoever the profits/bonuses are also calculated on the entire sum assured and not only on the balance amount. The premium for this plan is thus higher than endowment plan.

Unit linked insurance Plan (ULIP)

ULIP is also an insurance cum investment plan where one part of premium is used to provide life cover and rest is invested in debt and equity funds. It is like a mutual fund with an additional benefit of insurance cover. Like endowment plan its premium is also high.

Whole Life Policy

In all plans discussed till now, there is a time period till which the policy is valid and this is called maturity. In Whole Life Plan, there is no end to the policy term thus the policyholder continues paying premium till his death and his nominee receives sum assured at the time of his death. Thus the insurer enjoys the life cover over his entire life.

Pension Plan

Pension Plans are investment options that help in allocation of a part of your current savings to provide a steady income at the time of retirement. The amount of returns depend on couple of factors like when the contribution started, how much was the contribution, the number of years when the money should start coming and at what age.

Below is a comparison between the various insurance instruments-

Parameters Term Plan Endowment Plan Money Back policy ULIP Whole Life Policy Pension Plans
Primary Objective Pure Insurance Insurance + Investment Insurance + Investment Insurance + Investment Insurance + Investment Insurance
Premium Amount Lowest Higher than Term Plan Higher than Endowment Plan Higher than Term Plan Higher than Term Plan NA
Death Benefit Yes Yes Yes Yes Yes
Coverage Specified Time frame Specified Time frame Specified Time frame Specified Time frame Entire Life
Maturity Benefit No Yes Yes Yes Death & Maturity Benefit are same

Conclusions

While all insurance plans have their own pros and cons and the insurer needs to understand which one suits him best, one thing one needs to keep in mind. Term Plan is a pure insurance product and all other insurance plans give an additional portion of 'investment' along with this insurance. Hence while doing his own research, one should try and compare the premium amount for Term Plan + Mutual Fund and the ULIP/Endowment Plan. You would find this premium is definitely lowest for Term Plan combination.

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