BEFORE taking a decision on whether to opt for a traditional insurance policy or a Ulip, an investor has to understand how the two products operate.
Ulips provide both protection and savings combined with flexibility to investors.
These are equity-linked, and have the potential to deliver higher returns.
A Ulip investor has the flexibility to switch funds, determine the amount of investment and withdraw funds partially or systematically. Ulips also provide the convenience of pliable insurance cover, which can be increased or decreased at any time. However, a Ulip policyholder needs to be more involved as the investment risk rests with him.
On the other hand, traditional insurance plans -which include term, endowment and whole-life policies -offer multiple benefits in terms of risk cover, return and safety. These are considered risk-free, as they provide fixed returns in case of death or on maturity. Investment guidelines also ensure safety of funds with a cap on equity investment.
Traditional participating plans are the most popular category of traditional life insurance products. Though they are popular in Indian market for many decades now, there is still lack of understanding about them.
Participating plans provide the policyholder 90 per cent share of surplus whereas 10 per cent is the share of the life insurer. This sharing mechanism aligns the intent of both the policyholder and the life insurer, as high investment surplus will drive higher returns for both parties.
In participating plans, investments are primarily in debt instruments, as such returns do not have the volatility generally associated with equity-linked plans.
Traditional participating plans are truly protection-oriented financial instruments, as they have a strong sum assured orientation and consistent returns.
The biggest advantage of a traditional plan is that it is less prone to misselling as a large component of the returns is guaranteed. Bonus history also gives ample clarity on the possibility of future returns. Unlike equity-linked products, which go through cycles of volatility, returns are smoothened here.
Which product to choose?
After understanding Ulips and traditional plans, it is important to understand the criteria for choosing between the two.
The choice largely depends on the profile and goal of the investor. The investor's risk-taking ability, age, income or return expectation are crucial factors. A young investor may be more aggressive and opt for Ulips, whereas an older person in the same income bracket may choose an endowment policy for stability. How to choose a product?
The selection of the type of insurance product depends on one's risk-taking ability, which is ascertained through a number of factors: Income: An investor's future income expectation determines whether to opt for a equity-linked product or a safe instrument.
Age: Age an individual and the number of dependents is directly proportional to her risk-taking ability. Younger a person, more time he has to remain invested to average out market fluctuation, hence higher risk appetite.
Type of investor: Ulips are ideal for an aggressive investors who want higher returns and is prepared to withstand volatilities. Deciding whether to invest in a traditional plan or a Ulip is not easy and best left to the advice of experts such as agent advisors. Planning with an objective in mind can help make the right decision.
