Do you have the wrong type of Life Insurance?


In the last blog post we discussed the basics of Life Insurance and whether you should have one.

There are mainly 3 types of Life Insurance policies available today:

  1. ULIPs
  2. Endowment Plans or Moneyback Insurance policy
  3. Term Plans

They are very different from each other and only one of them is good for you. Unfortunately that's the one you are least likely to have bought.

Let's look at them one by one.

1. ULIP

It stands for Unit Linked Insurance Plan. It's a combo product mixing insurance with investment, something which you should avoid.

In a ULIP, a small part of your annual payment goes towards providing your insurance and the major chunk gets invested in a stock-market Mutual Fund-type investment scheme.

There is usually no or very limited choice of investment schemes and there is a lock-in of 5 years. Even if the fund behind the ULIP is doing bad, you cant do anything about it.

Also, apart from the fund fees, the ULIP provider subtracts several miscellaneous charges which can easily total up to 3-5% of your investment every year.

Because of all this, the returns one gets from ULIP investments stays in the range of what one would get in FDs and that too after taking stock market risk.

Totally avoidable.

Also, since the major chunk of money goes towards investment, an annual premium of say Rs 20,000 will only get you a paltry life cover of around Rs 5 lakhs.

Any decent life cover should be at least 10-15 times your annual income. So to get a life cover of Rs 1 Crore, you will need to have an annual premium of around Rs 4 lakhs out of which the insurance paying part would be hardly Rs 15,000-Rs 20,000!

2. Endowment Plans or Moneyback Insurance Policy

This is the most popular (and the least useful) one. All your Jeevan Anands and Jeevan Sarals fall in this category.

It is also the one with the most amount of mis-selling.

This too is an insurance-cum-investment product and one should just run away from it.

Typically pedalled as a guaranteed-returns investment by your neighbourhood uncle as soon as you get a new job, this is the worst way of buying insurance or making investment.

Firstly they come with huge lock-ins of 10-20 years. If you want your money in between, you will get much less than what you have put in so far (forget any returns).

Secondly, as with ULIPs more than 95% of the annual premium goes for investment rather than insurance.

Thirdly, there is zero transparency. You have no control over your investments. You won't even know how much your policy is worth in any year.

Lack of transparency means the insurance provider can deduct any fees that they want from your investment returns.

Fourthly, despite whatever the sales agent tells you, these don't have any guaranteed returns. Just ask him to show you the word "guaranteed returns" in the policy statement.

And finally the icing on the cake - after the long wait of 10-20 years, the final returns that you will get will be less than an FD!

The internet is full of complaints of mis-selling against one very big insurance company that has made a fortune by selling these polices to us and our parents. (hint: the company name rhymes with BIC).

At Goalwise, we get numerous requests from people who bought such policies 2-3 years ago and now want to know the least damaging way to get out of them.

Please, please avoid buying such policies. Better to put all your money in an FD than do this.

3. Term Plan

A Term Plan is the simplest of the three life insurance types.

It is just pure insurance (like your car insurance). No moneyback since no money is ever taken for investments.

Because of this, it is insanely cheap as compared to ULIPs and Endowment Plans.

You can get a life cover of about Rs 1 Crore just for a premium of just Rs 10,000 annually.

Insurance is not investment and Term Plan is the best way to keep them separate.

Buy a good insurance term plan (e.g. LIC e-term, HDFC Life Click2Protect 3D Plus) with a big enough cover (at least 10-15 times your annual income) for it to be actually useful and invest your savings in the best Mutual Funds separately where there will be full transparency and you will be able to access your money whenever you want.

If you don't want to take a lot of risk, you can split your money between Equity Mutual Funds and FDs/Debt Mutual Funds.

If you don't want to take any stock market risk, put all of it in FD. You will still be better off than buying an Endowment plan.

So which one of these do you have?

I hope it is the term plan but in case it is one of the other two, now would be a good time to check up on them and go through their policy documents. Compare them with what you have been expecting.

If you need any help, let us know in the comments or drop us an email on care@goalwise.com. We'll be happy to help.