Term insurance vs ULIPs: A reality check
In recent days it has become fashionable to discourage investors from buying unit linked insurance plans, ULIPs.
The reason: High administrative, mortality and fixed annual charges. Instead, term insurance plans offer better insurance to the life covered, so goes the argument.
While each and every insurance product has its advantages and disadvantages compared to other such similar products, insurance buyers must understand their need for insurance before buying any insurance product.
The current article dwells on the advantages that a ULIP has over term insurance plan. Or rather, it tries to remove some misconceptions about ULIPs.
To understand this better, let us go through a conversation between two friends.
Conversation:
Friend one: I am thinking of buying an insurance plan to cover my life. Not sure whether to go in for a term plan or a ULIP.
Friend two: Don't think twice. Go for a term insurance plan. They are the best way to cover a life
Friend one: But I have heard that in term plans no returns are available at the end of the plan period if I survive?
Friend Two: Yes. But why do you need returns from an insurance plan? You know my friend never mix investments with insurance. Keep them separate. You can always become rich by investing in mutual funds or equities. Take my word, go in for a term plan.
Friend One: You may be right. Hey, do you have any workings or illustrations, which I may go through before I decide on this?
Friend Two: Arrey yaar, why do you need workings? Don't you read newspapers? Don't you read the columns written by experts? All of them say that term plans are the best. If they are saying that term plans are good, they must be good. Anyways, who has the time to go through workings and all? I trust these free advices totally. I suggest you do the same too.
Friend One: But I don't know anything about investing in mutual funds or equities. What do I do?
Friend Two: Don't worry about that. There are financial planners who will plan everything for you. Just leave everything to them. They will help you out.
A real life example
One of our clients, let us call him Amit, wanted to take a life insurance cover. He had taken a home loan of Rs 45,00,000. He wanted a matching life cover to ensure that in the event anything happens to him, the maturity proceeds from the insurance could be used to repay the housing loan. He had two options before him.
Either buy a term plan or go in for a ULIP. We looked around for a number of options for a term plan. Given below are the quotes from various insurance companies for a life cover of Rs 45,00,000 for a person aged 32 years. The term of the cover is 25 years.
Life insurance company
ING Vysya Life Life cover (Rs)
45,00,000 Premium per annum (Rs) 15,298, Term (In years) 25
LIC of India 45,00,000 16,110 25
ICICI Prudential 45.00,000 15,496 25
Tata AIG Life 45,00,000 16,609 25
Om Kotak 45,00,000 16,482 25
Met Life 45,00,000 15,994 25
Max Newyork Life 45,00,000 15,795 25
Several comments are made against the insurance companies and advisors in general. Please understand that different products are structured to suit different individual needs of the customers. If endowment products have worked well since the last 50 years, it is not only due to the mis-selling by advisors.
Give credit to the product also which has enabled thousands of families to save regularly over a period of time and given them returns when they needed it the most.
Similarly if ULIPs are working well now it indicates the success of the product in tapping the latent demand existing in the market.
At the end of the day if you are convinced, for good or bad, buy what you want. But do take care to properly analyse the products and their pros and cons.
