Types of Life Insurance Policies: Non Traditional Policies

Endowment Plan | ULIP

Non Traditional Insurance plans are result of a new idea to reap better returns along with the provision of insurance. As a result, these plans have two components, which are self explanatory with their names:

  1. Insurance
  2. Investment

Hence, the premium for these insurance plans have to satisfy both these components and is usually the highest amongst all insurance plans. A common man can consider all the insurance plans which are marketed as wealth creation plans. 

Stay invested for long!

The mantra that is used for these investments based insurance is to stay invested as long. This seems true as the investments do not reap returns over a short term of 2-3 years and when one redeems in these cases, he feels cheated that he hasn’t got what was promised to him at the time of investing. These insurance plans are more risk oriented as their insurance plans are dependant on the market returns. The investor/insurer is usually not aware about the market component and its crucial factor in deciding the returns of the plan.

This is also the reason that consumer complaints regarding insurance plans have increased and an unpopular opinion of losing money in insurance has popped up.

One of most common non traditional life insurance policy is the Endowment Plan.

ULIP: Marketed as synonymous to Endowment Plans

Unit Linked Insurance Plan, or ULIP, is an investment insurance product customised for life as well as retirement (pension) prospectives. ULIP are often compared to mutual funds, which unfortunately defeats their purpose.

In this plan, premium is divided into various units. The insured can choose the funds in which he wants to invest these units/premium amount.

Depending on the risk appetite, one can choose from equity based or debt based funds for his premium. As per his decision, suitable returns generated get accumulated in his insurance’s benefits. The returns are compounded and eventually turn out into a huge amount upon the maturity of the plan.

Upon the expiry of the insured, his heirs are entitled to the accumulated benefits or the sum assured or both minus the premiums pending, as per the policy agreement.

Full Endowment Policy: These insurance policies do not allow the insured to choose from the funds available. The investments are decided by the insurance company’s fund manager, who allocates and shuffles across various market investments (mutual funds, stocks, bonds, commercial papers etc.). The insured has an assured return for the amount upon his expiry and in the case of survival, the sum assured plus the variable market based returns are given to the customers.

Since they serve the dual purpose of investment and insurance, non traditional policies enable to save tax under multiple sections, most commonly being section 80 (C) and 10 (10D) of the Income Tax Act, 1961. 

Apart from tax saving, other benefits of these plans are compounding on the returns, loanable, high liquidity (can be surrendered and redeemed quickly).

Non traditional insurance are usually not advised by experienced advisors for they fail to commensurate with insurance as well as investment need.

A popular opinion also says that investment and insurance are never to be merged together as they both have different purpose and different beneficiaries.

However, these policies are still in the market and are evolving everyday and becoming more and more lucrative everyday.

The investor cum insurer is always advised to first check his pocket and then decide on what would his family exactly need in his absence.

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