PROTECTION + SAVINGS INSURANCE :
Life insurance is usually a long term contract and thus is used world over as an effective investment instrument. In Protection cum Savings insurance products, in addition to getting a pure term insurance cover, the policyholder is also able to leverage long term savings. Life insurance plans are an excellent choice for providing for Protection needs, Long term goals such like children’s education and marriage, retirement and others.
In such plans, the premium payable is divided into two parts:
− Premium for life coverage – provides financial protection in case of death
− Premium for savings element – Is invested by the insurance company on behalf of the policyholders.
The returns earned from investment are set-off against the expenses and the surplus is shared among policyholders in the form of bonuses. Here the investment risk is borne by the Insurance company.
(1) Endowment Insurance – An endowment insurance offers death cover if the life insured dies during the term of the policy and also offers a Survival benefit if the life insured survives until the maturity the policy.
Some of the key features of an Endowment insurance plan are –
• If the life insured survives the entire term of the plan, then a specified amount is paid to him/her on maturity of the plan
• If the life insured dies before the maturity of the plan, then the death cover benefit is paid to the nominee/beneficiary
• Savings element: After deducting the death cover charges & administration charges from the premium, the remaining amount is invested by the insurance company. The returns earned are later paid back to the life insured in the form of bonuses.
• Goal-based investment: Helps in accumulating money for specific plans like a child’s higher education or marriage, etc.
• Some insurance companies also allow partial withdrawal or loans against these policies
• There are different variants under this plan –
− Higher death cover than the maturity benefit
− Maturity benefit is double the death cover, known as a double endowment insurance plan
(2) Whole of Life Insurance – A term insurance plan with an unspecified period is called a whole life plan. Some plans also have a savings element to them. The insurance company declares bonuses for these plans based on the returns earned on investments. As the name of the plan specifies, this plan covers the individual throughout their entire life. On the death of the life insured, the nominee/beneficiary is paid the sum insured along with the bonuses accumulated up until that point in time. During the individual’s lifetime they can make partial withdrawals to meet emergency requirements. An individual can also take out loans against the policy. Although, in case of Whole Life Plans, sum assured is payable only on death, some insurers pay the sum assured when life insured completes a certain age. For example, 80 years, 90 years, 100 years, etc.
3. Unit Linked Insurance Plan
A Unit Linked Insurance Plan or ‘ULIP’ as it is popularly known is basically a combination of insurance as well as investments, similar to a protection cum savings plan. While a part of the premium paid is utilized to provide insurance cover to the policy holder the remaining portion is invested in various equity and debt schemes. A fund is created from a pool of premiums collected from policyholders and the fund is used to invest in various market instruments (debt and equity) in varying proportions similar to mutual funds. The significant difference between a protection cum savings plan and a ULIP is that the investment risk in a ULIP is borne bythe policyholder (similar to a Mutual Fund), whereas the risk is borne by the Insurance company in the other case. The Policy holders can select the type of funds (debt or equity) or a mix of both based on their investment need and risk appetite. ULIP policy holders are allotted units and each unit has a net asset value (NAV) that is declared on a daily basis. The NAV is the value based on which the net rate of returns on ULIPs are determined. The NAV varies from one ULIP to another based on market conditions and the fund’s performance.
Features – ULIP policy holders can make use of features such as top-up facilities, switching between various funds during the tenure of the policy, reduce or increase the level of protection, options to surrender, additional riders to enhance coverage and returns as well as tax benefits.
Types – There are a variety of ULIP plans to choose from based on the investment objectives of the investor, his risk appetite as well as the investment horizon. Some ULIPs allocate a larger portion of the invested capital in debt instruments while others purely invest in equity. Again, all this is totally based on the type of ULIP chosen for investment and the investor preference and risk appetite.
Charges – Unlike traditional insurance policies, ULIP schemes have a list of applicable charges that are deducted from the payable premium. The notable ones include policy administration charges, premium allocation charges, fund switching charges, mortality charges, and a policy surrender or withdrawal charge. Some Insurer also charge “Guarantee Charge” as a percentage of Fund Value for built in minimum guarantee under the policy.
Risks – Since ULIP returns are directly linked to market performance and the investment risk in investment portfolio is borne entirely by the policy holder, one needs to thoroughly understand the risks involved and one’s own risk absorption capacity before deciding to invest in ULIPs.
4. Variable Insurance Plan Variable life insurance is a permanent life insurance policy with an investment component. Variable universal life insurance can help meet the needs of those who want life insurance protection with the potential to build cash value. The policy has a cash value account, which is invested in a number of sub-accounts available in the policy. A sub-account act similar to a mutual fund, except it’s only available within a variable life insurance policy. A typical variable life policy will have several sub-accounts to choose from, with some offering upwards of 50 different options. The cash value account has the potential to grow as the underlying investments in the policy’s sub-accounts grow – at the same time, as the underlying investments drop, so may the cash value. The appeal to variable life insurance lies in the investment element available in the policy and the favorable tax treatment of the policy’s cash value growth. Annual growth of the cash value account is not taxable as ordinary income. Furthermore, these values can be accessed in later years and, when done properly through loans using the account as collateral, instead of direct withdrawals, they may be received free of any income taxation. Similar to mutual funds and other types of investments, a variable life insurance policy must be presented with a prospectus detailing all policy charges, fees and sub-account expenses.