"The premium rates for term plans varies from Rs5000 to Rs15000"

Charges in Ulip has come down from 30-40% in the first 3-4 years to less than 5% - Naval Goel, CEO, PolicyX.com 

Thursday, December 31, 2015

Most of us have this problem, that we treat insurance as tax saving instrument. We traditionally seemed to have believed more in the endowment and ULIP plans rather than pure protection. So, up front give us some clarity on what the difference between this two is?

Basically term plans provide you pure protection at a very low cost, where as endowment plans or investment plans, they are basically to invest money. They provide very small sum assured or coverage but your money goes in mostly in investing in shares on mutual funds or debt instruments.  So the objectives are very different for both of these types of plans. So term plan is only for protection. Only in case of death it provides the sum assured so if the person survives the term he or his family doesn't get paid anything.

Where as in investment plan, for example you pay a premium of Rs000/- annually, your sum assured in investment plan would be in the range of Rs500000, for 50000 premium. Whereas, if you go for a term plan you can get a sum assured of Rs 1 crore at a very low premium of Rs10000 annually. So, because it pays only in case of death and probability of death is very low, so that is why insurance company charges a very low premium.

What is Rs500000? It's not even going to last your family 3-4 months, leave alone a lifetime if you die.

Most people think of, when a person pitches them a term plan, what they tell is what do I get in return, what they don't understand is it is a pure risk protection. It's a very big problem, in case something happens to the bread earner of the family, the whole family can't survive in that Rs500000 sum assured or Rs700000 sum assured. So they definitely need a term plan. However, Indian mentality is that if I don't get back anything in case I don't die, I won't go for that policy but that mentality is changing a bit as people are getting aware.

Earlier term plans were not even sold by agents, since the premiums are very low, the commissions are very less, so they didn't sell them aggressively. They always focused on investment plan, endowment plan where the premium is high where they get a good cut out of it. But from consumers stand point I would definitely suggest everybody to have a term plan.

Let's talk about the investment side because again we did see a lot of miss selling in the past. The charges were very high when we talk about ULIPS or endowment policies. Almost going up to 40-45% in the 1st year, that has been corrected to some extent. But the larger issue still remains, that people think that just because there is a 5 year lock in, these products are only for 5 year.

Any investment that you make, you should have a horizon of long term like 10-20-30 years even because that is your savings and you should not treat insurance as your savings. It's a very separate thing. So as I said, if you have Rs100000 as disposable income for insurance, you can basically invest Rs10000/- on a term plan and the remaining Rs90000 can be invested in ULIP plan where the charges are low.

Earlier it was very high, and people were basically charged so much that their investment returns were so less, now that has been corrected. They can go for a longer term ULIP plans with, if the horizon is long, I would suggest them to go for equity oriented ULIP. A 10-15-20 year is a good enough horizon for equity investments. Have the charges come down dramatically, especially if you buy online?

It has come down from 30-40% in the first 3-4 years to less than 5%. It is definitely less for online plan and its very convenient to buy online too. People can definitely look at ULIP along with a term plan combination which will give them protection as well as ULIP plans. They should not think in terms of, 'I am not getting anything back from this policy if nothings happens to me', because insurance and investments are two separate things. Only because of 80C benefits I recommend ULIP, otherwise I would suggest go for a mutual fund or anything, but since they get a 80C benefit in the beginning which is 30% of the total amount, so ULIP does make sense.The premium just keeps rising as you grow older and since we have a lot of young viewers, can you give me an example of why it is so important that you buy as early as possible?

Ideally term plan should be bought whenever a person starts earning or whenever a person is married. As soon as somebody else is dependent on your income that is the objective of a term plan. Since somebody else's life is dependent on your income, if something happens to you, the term plan pays off. So, generally a person should buy a term plan at the age of 25, which is when he starts earning and the ideal term for a term plan should be 60, which is retirement age in most cases, minus the current age.

But the only challenge there is the insurance company would not give you a sum assured of 10-12 times of your income or more than that. So, for example a person at 25 is earning 10 lakhs, he can get a term plan for Rs1crore. But at age 35 he might be earning Rs30 lakhs that is when you can add more, not on the same plan but on another plan. For that particular amount, say for example 1cr you bought at 25 you now are eligible for a Rs3 crore plan, and then you can buy another plan with Rs3 crore sum assured or Rs2 crore additional sum assured. So for that Rs2 crore you are paying a higher premium but the initially amount you have got it cheaper. A term cover is a simple product, is there a lot of difference between one company and another?

You will be shocked to know that a premium for a very similar plan, for a same sum assured, everything else being same like- age, smoking habit etc, the premium varies from Rs5000 to Rs15000. That is kind of difference we are looking at.

So you can easily save up to 50% of your annual premium if you compare different companies plan from different companies. Some companies are very aggressive; they want to capture the market share. They have provided that benefit of aggressive pricing to the customers, so why not go for them.

As long as you are sure that the company will be around 25-30 years down the line because term plan is usually has a very long horizon. And it's very important, the most important part of the portfolio. So you should just list down the companies that you should have complete faith on, in terms of private or public companies, and make a short list of 10-12 companies and go for the premium lowest premium. And you will see there is a huge difference, you can save 40-50% in annual premiums.


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