This article compares endowment policies and ULIP with Term Insurance, and recommends the best option for life insurance.
Are ULIPs the best?
We know that a Unit Linked Insurance Plan (ULIP) proves to be better than an Endowment plan.
(Don’t know this yet? Read “ULIP v/s Endowment Plan for Life Insurance“)
But the real question is – Is a Unit Linked Insurance Plan the best way of buying insurance? Let me cut to the chase and give you a straight answer – No, it is not. And now, let’s see why!
Separating insurance and investment
Why does one buy life insurance? What is the need for life insurance?
The answer is simple – Life insurance is bought so that our dependents can continue to lead a normal life even when we are not around.
When you buy insurance for your car, or your home, do you expect any return on that “investment”? Do you expect that if the car doesn’t meet with any accident, you would get the money plus some interest on it back at the end of the year?
Of course not! Then, why should we expect our Life Insurance to pay us back, and in turn pay a lot more for insurance than it actually costs? Should we not buy “pure” insurance, like we do for our car or home?
Yes – that is exactly what we should do! We should understand that insurance and investments are different, and they need to be treated differently.
For investments, you need to identify goals and strategies, and make investments accordingly. (Please read “Goal Based Investing“).
For life insurance, you need to calculate an amount that your dependents would need, so that they can lead a normal life out of the returns generated from it. This amount should be the “Sum Insured” when you buy a life insurance policy, and it should be a risk-only policy.
Term Insurance or Term Policy
Term Insurance provides such a pure, risk-only cover for your life. It is a type of insurance where your premium amount is used only to buy insurance for you – just like car or home insurance.
Since the premium amount is used only for insurance, the biggest benefit of a term insurance policy is that it provides life insurance at the lowest possible price. This means that the money saved can be invested in other avenues to fulfill other goals, while still enjoying the benefit of adequate insurance!
One perceived drawback of Term insurance plans is that you don’t get back any money at the end of the term if you survive. As we discussed earlier, just like insurance for your car, you need not get anything back!
But if the fact that you don’t get back any money at the end of the term bothers you, there is a variant of term plans available – and it is called Term insurance plan with return of premiums (ROP). Here, if you survive the term of the policy, you get back all the premiums you have paid. And the added benefit is that this amount is tax free! But please note that the premium amounts are higher in term insurance with return of premiums as compared to regular term insurance plans.
Illustration
For a sum insured of Rs. 10 Lakhs for 25 years for a 30 year old male, following are the indicative market rates:
- Endowment plan: Rs. 38,109 per year
- Term plan with return of premium: Rs. 8,836 a year
- Term plan: Rs. 2,964 a year
As you can see, there is a huge difference in the premiums, and as we discussed earlier, this saved money may be invested better in other avenues.
Please read “Are ULIPs a costly form of term insurance plus MF investments?” to know how term insurance and the money saved can be utilized effectively.
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Hi,
The purpose behind what I write is to make financial matters as simple as possible to understand, so that people having absolutely no background in finance can also take informed decisions.
I am happy that I am being able to achieve this, and am very glad that I am being of help.
Thanks for the kind words…
Thanks a lot. You are doing a great job to the people who do not know nothing about financial situation. Also your language, articles posted on the site is very lucid, unambiguous.
Hi,
How much money can be deposited in a monthly income scheme fixed deposit without attracting TDS,as i would like to invest about Rs. 12 lacs and planning for a retirement
Regards
dilip
Hi Dileepkumar,
The maximum you can invest in the PO MIS is Rs. 4.5 Lakhs for a single account, and Rs. 9 Lakhs in a joint account.
Please check out An introduction to Post Office Monthly Income Scheme (PO MIS) for more on the monthly income scheme.
Hi Sanket,
Thanks a lot for the praise… It is really encouraging!
I usually do not give out any policy / stocks / mutual fund name on the site. However, since you are specifically asking for LIC, maybe I can
LIC offers two term plans: Anmol Jeevan and Amulya Jeevan. You can choose between the two depending on the features and premium.
A note on insurer: You have asked specifically for LIC – I am sure you have a reason for that. However, all insurers in India are highly regulated, and are equally trustworthy.
Thus, you should not shy away from buying insurance from a private player.
Also, term insurance is a pure rick cover, with no frills. Therefore, the only differentiator is price. So, ideally, you can go with the insurer offering the lowest premium.
Your wife: We buy insurence so that the amount can tale care of our dependents if we are no more there. Thus, you should buy insurance for your wife if she has any dependents.
I personally always advise term insurance plans, as they provide the maximum cover at the minimum cost.
Foremost, this is one of the most informative site I have come across relating to financial planning. Keep up the stupendous work.
Can u please suggest some good term policies, preferably LIC, for a male, 30 years and earning 8 lacs per annum?
Further should I go for a term policy or should I go for a money back policy for my wife? She earns 7000 per month and is 27 years old.
Hello Sir,
In your previous comment you have mentioned that all insurers in India are highly regulated and are trustworthy.How did you conclude that Sir?
I am yet to take a term insurance.My first priority was cheap premium and I have been searching and comparing premiums offered by different private players in this field.But now after seeing many insurers failing abroad i feel like i should give top priority to trust worthiness of an Insurance company rather than their premiums.
Though all insurers come under IRDA’s control what are the other factors we should look out for while taking a term insurance policy from any private player?
Regds,
Venkat.
Hi Venkat,
All insurers in India are regulated by IRDA.
IRDA has very strict capital adequacy norms – this means that all the insurers need to have a certain amount of capital in proportion to their business.
Thus, the insurers in India have enough cushion to sustain losses.
However, if you want even more safety, I would suggest the following order:
- Life Insurance Corporation (LIC) of India (It is 100% owned by the government)
- PSU banks having tie ups with private companies
- Private insurers
However, I would like to reiterate that all insurers in India are safe due to their strict regulation.
Hi There,
Really nice site and tons of useful information. I have just came across it will need more time to go through your previous post. congratulations for all the hard work.
Vijay
Hi Shantharam,
Thanks a lot – I am glad I am being of help… I have reviewed SBI Shield Plan – you can read about it here: Term Insurance – SBI Life Shield PlanHi Viki,
Thanks a ton…. I am glad that my articles are useful to you…
Hi ,
This is really an excellent info site for all who wish to do better financial planning. Keep up the good work.
I have a query. Going by the discussion on term insurance plans, i understand that it is the best insurance policy. As you said that even private players are at par with LIC in this, can you suggest if the SBI Life – Shield Term insurance plan is good enough ?
Thanks..
Hi,
Thanks for the informative article. I wanted to take Term Plan for my wife, who is not working. However, many advisors have said that companies don’t offer “Term Plans” to housewives. Can you tell which companies offer term plans for housewife?
Regards
Srinivas
Hi Raagava,
I was trying to search for these Universal Life Plans (ULP) couldn’t find any illustrations online.
how much would I need to invest to get insured for 30 Lacs & how much would I accumulate if I give premium of 3000 per month for the term of 20 years?
Thanks & Regards,
Raghu Prasad
There is no more appreciation left to be heaped on you as tons of them have already been made above.
God bless you for this wonderful SERVICE without any expectation.
Term insurance w/o ROP : Amulya Jeevan
Term Insuracne with ROP : Jeevan Amrit
Pls confirm whether my understanding is right.If not, pls let me know what LIC term insurance policy is with ROP?
LIC offers two term Insurance policies – Anmol Jeevan and Amulaya Jeevan. Both are term insurance plans however their premiums differ significantly. I would like to know the difference in these two policies.
Thanks & Regards
Sanjeev
LIC offers two term Insurance policies – Anmol Jeevan and Amulaya Jeevan. Both are term insurance plans however their premiums differ significantly. I would like to know the difference in these two policies.
Thanks & Regards
Sanjeev
i have to take term insurance plan for my father. his age is 52. so,please suggest me which plan i have to take. i heard lot about icici iprotectwith accidental cover.is there any other plan better than this?
THANKS & REGARDS
MAHESH BHARDWAJ
Hello,
I found your website quite useful and quite logical in the approach to investment solutions. I have recently invested in ING Vysya Golden Life Equity Pension Investment plan. Can you review it and let me know the Pros and Cons of the plan ? As of now i have decided to go maximum equity for next 5 years that i am planning. I might decide to switch into a safe one later or reinvest the returns into something better.
What would be your advise for this 35 year old investor ?
Hi Sir,
You have written that private insurers in India are as reliable LIC due to regulations. However a friend pointed out the IRDA annual report 2008-2009 to me in which the claim settlement ratio for LIC at 95% is much higher than those for many pvt insurers whose CSR range from 40-90%. Should’nt we consider this figure when evaluation term life insurance providers credibility ? Also what can be the ground for repudation of claim in term insurance – as they are supposed to cover everything.
Sir,
Is is true that one can’t hold more than one term policy in ones name.I don’t think so…but I herad somewhere its that way…Pls clarify…
Nope… You can hold as many term policies as you please – provided the companies are willing to issue them.
You normally have to disclose your other life insurance policies while applying for a policy, and if the company feels that you already have life insurance above their threshold, they can refuse you a cover.
What is the difference between endowment plan and term plan. Why is the premium paid for endowment plan is more. Please explain.