Life Insurance plans can be broadly classified into 2 types: Traditional Plans and ULIPs (Unit Linked Insurance Plans). Here I will focus on Traditional Life Insurance Plans and how they work.
Here I will focus on Traditional Life Insurance Plans and how they work.
What kind of plans are called Traditional Life Insurance Plans?
The following are the basic features of traditional life insurance plans:
The money that you pay as premiums are invested in very low risk financial instruments. Since the risk is very low, the returns too are low. Don’t expect phenomenal returns when you buy into such plans, even if your advisor promises you the same. Most traditional plans will generally offer a return between 3% to 6% annually.
You cannot decide or participate in how your money should be invested. It is decided by the insurance company and controlled and monitored by them.
Such plans offer either a Guaranteed Maturity Amount or offer a bunch of Bonus Amounts which are declared at various points during the term of the policy. Though the Bonus amounts are not guaranteed, we can be fairly assured of a fixed rate of return.
These plans don’t offer flexibility. You have to be invested for the length of the policy term. If you try to surrender the plan mid-way, you will get back much less than the amount of money you have paid as premiums. So even if you are investing in traditional life insurance plans, do so with an amount which you can comfortably afford paying throughout the policy term. These plans also do not offer any partial withdrawal in case of any emergency fund requirement of yours. You will get the money only at the time of Maturity.
The amount of insurance cover which you get in these plans is very limited. Most plans will offer a 10 times cover of the amount of annual premium that you pay. So if you are paying an annual premium of Rs. 50,000 you will get a cover of Rs. 5,00,000. Surely 5 lakhs is not a sufficient amount of insurance cover for your family. So strongly recommended that you take a term plan before venturing into investment plans. Compare term plans here.
There is no information on the charges which are applied in the plan. You will only know the premiums which you pay and not how they are applied or invested across the years and what the deductions are.
MIC Pro-Tip: Invest in Traditional Life Insurance plans if you are OK with low but stable returns. Also ensure that you have the capability to stay invested throughout the policy term – keep the premium amount to a value you can comfortably afford – don’t stretch yourself to achieve the tax free slab in the year that your are purchasing the plan.
