Since the opening up of the insurance sector in 2000, life insurance products have evolved from traditional savings to protection cum investment instruments. Insurance is a need based financial planning instrument and one should define what their requirement and risk appetite is before deciding on the type of product. From securing children’s education, to retirement to income protection, these products help customers address multiple needs.
There are various types of insurance products available in the market and are typically divided into two broad categories – ULIPs (equity linked) and Traditional (primarily debt instruments). As ULIPs are equity linked, the profit as well as the losses are transferred to the policyholder account, there are no guaranteed returns. These are long-term saving instruments and one should not be concerned by short-term market fluctuations. Incase of traditional products, the defined benefit at the time of purchasing the policy is given to the policyholder on maturity. Some traditional products also come with the ‘With Profit’ option. The profit here is basis the surplus for the financial year and is given to the policyholder in form of a bonus which is declared on a yearly basis. Usually, there are no drastic changes in the bonus percentage year on year as the bonus is dependent on long term performance of the company and is not impacted by short term fluctuations or investment performance.
Let us take an example: If the a policyholder has taken a ‘with profit plan’ paying an annual premium of Rs 11,000 and a life cover of Rs 100,000 for a policy term of 10 years, and the bonus is 5% per annum (let us assume that the bonus is the same for each year), then every year an amount of Rs 5000 will continue to accumulate for the entire policy-term. Hence the maturity value, if one survives the policy-term, would be Life Cover + Accumulated Bonus amounting to Rs 150,000.
Taking a similar scenario for ULIP where premium, life cover and policy term are the same, the maturity value will be the market value of Investment premium (Sum of Premiums paid less charges) which is dependent on the fund performance.
The two products should not be compared as they are meant to service different risk appetites.
Article by Mr. Gaurav Rajput Director- Marketing Aviva India.Google+