Insurers offer a range of products. On the one end is a term plan that offers a pure life cover and acts as an income replacement in case of the untimely death of an earning member in a family. Its entire premium goes towards buying a life cover.
At the other end,) cater to both insurance and needs. A part of its premium goes towards buying a life cover while the rest is invested in , debt or a combination based on one’s understanding of risk.
The big question is whether to buy aor just a term policy from an insurer? Or in other words, should we separate the insurance needs from that of ?
Let’s compare the two options on the following parameters:
Supposing you bought a separate term cover and invested the rest into. How would it compare with that of ? Past data shows that on an average have managed to outperform portfolios of across various categories – large-cap, mid-cap, and multi-cap – as well as across various time horizons (See graph). In each category, top performers gave superior returns as compared to their counterpart.
Mortality charges are levied for insuring life and are dependent on a number of factors including one’s age and health condition. Usually, insurers refer to a standard table for levying these charges and are the same regardless of whether you buyor a term cover.
As per the new IRDA guidelines, ainvestor has to buy a minimum cover of seven times the annual premium. So, regardless of whether you already own a life cover or not, you will get additional life cover when you buy an , without any discounts whatsoever.
There are many charges levied tothat make it a costlier proposition than an . Premium allocation charge is deducted as a fixed percentage directly from the premium paid. Fund management charge in turn is levied for managing various while a policy administration charge is levied for the administration of the policy. In addition, there are partial withdrawal charges, switching charges, premium redirection charges, premium discontinuance charges, top-up charges and mortality charges.
As per regulations, aprovider could annually charge up to 3% of its NAV as expenses for a duration of up to 10 years. In contrast, under regulations, an asset management company can charge only a maximum of 2.5% as the total for the first Rs. 100 crore of its assets and it keeps reducing as the asset size increases.
is available for a tenure of five years or more. And there is a of five years during which investors will not be able to liquidate the value of the . Discontinuing or surrendering the policy prematurely results in a penalty, while the money is returned only after the is over.
, in turn, have no such lock-in except in case of (of three years). While there are exit loads levied depending on the type of , it is very low (about 1%) and applicable only on early exit of one year or so.
It is better to separate the insurance needs from that of. Buy a term policy for your insurance needs, while in to meet your financial goals.