If you are like most Indians, someone somewhere would have tried to sell you insurance. An avatar of insurance which would have been offered to you as a “too good to be true”option would have been the or . We explain why are not the best option for you and the alternative, of in , is better.
are sold primarily based on this ‘Two-in-One” promise and at first glance it seems like a good idea. But as an investor you have to be careful that you don’t get something that does neither of the two things very well.
So the comparison is not between ULIPs and mutual funds but between and a combo of + Term .
We believe the second is clearly a better option.
Why it is a bad idea to combine investments and insurance.
# 1. Comparing for Insurance
a.lead to under insurance: The amount of insurance available as part of is generally far less as a large portion of the premium goes towards . Let’s try to understand this with an example. Ravi is in his early 30s and a non smoker. As he just got married, he wants to buy .
He has two choices. One is to go for a term plan that will set him back by Rs. 8000 per annum for a term plan that will fetch his dependents a sum assured of a crore (Ravi actually needs more than a crore – more like 2 Crores – so his annual premium expense might actually be roughly Rs. 16,000).
The other option is a. For a , the minimum he needs to pay each year is generally above Rs. 10,000, just for a possible sum assured of Rs. 1 Crore. The issue here is that he can’t be sure his dependents will get a crore at least. The sum will depend on his performance (which is difficult to predict).
If Ravi goes with a, there is a substantial risk of being under-insured.
b. Term insurance is a standardised product. All insurance companies provide exactly the same terms and you can easily evaluate the best policy basis the price (Even claims ratio is no longer a big factor).
c. Termis not linked to the . Your are small and there is no risk of losing it because you failed to make a large premium payment due to financial constraints.
# 2. Comparing for Investments
a. The Read more here.component of is more expensive than a in terms of charges – maximum reduction in yield for allowed at 4% in the 5th year of the policy vs 2.5% maximum for .
There is also the case of multiple charges levied on a. There are 6 extra charges apart from mortality charges. They are Premium Allocation Charge,Fund , Policy/ Administration Charges, Surrender Charges, Fund Switching Charge, Service . This substantially increases the complexity that is involved in choosing a versus a or a term insurance plan.
b. The track record ofis not available for analysis separately whereas you can compare and evaluate the best easily.
c. If youris not doing well, switching to a better one is not as easy as in the case of a . Not only do you lose money in charges but you also lose the associated Insurance and may have to go through the process of medical underwriting again.
# 3. Comparing tax benefits
are often pitched as tax saving because the entire premium can be claimed towards Sec 80C (apparently a “Three-in-one” product).
Even on this front, keepingand insurance separate works better for you.
Buy the Term Insurance you need. The whole premium is admissible for tax saving.
Then tax saving funds (ELSS) with much higher historical returns and lock in of only 3 years. The saved amount is admissible for .the amount you plan to into
In almost every conceivable way,lose out to dedicated insurance or products. So if insurance is your main goal, go for a term plan. If your goal is pure wealth creation, are the best way to go.