Insurance for all seasons, and for the right reasons

A good investment strategy is one that intrinsically incorporates the critical element of protecting your interests in case of unforeseeable circumstances.  Insurance is one such financial instrument that provides a critical hedge against future financial liabilities by accumulating savings and creating a corpus for retirement.

Today, you have a range of choices available to you to protect your family’s financial future – whether the goal is wealth accumulation, wealth creation or tax savings. In choosing the right insurance policy, you are faced with the option of either a Traditional Insurance Plan, offering a guaranteed minimum sum assured, or a Unit Linked Insurance Plan (ULIP), which now comes with a minimum non-zero guaranteed rate of return, usually at around 4.5%.

Traditional Plans, which may be Money Back plans, Endowment plans or Term plans, provide guaranteed returns in the form of sum assured plus a conditional bonus. They are geared towards encouraging savings in a risk free manner and more suited to those who are looking for adequate life cover. Traditional plans now come with a minimum death benefit of 10 times of the premium paid in each of the years or 105 per cent of the premiums paid, whichever is higher. Surrender values too have been restrained and so those who need to pull out of a policy before it reaches maturity for any reason will benefit from this.

In addition to having low exposure to risk or market vagaries, the recent IRDA guidelines have ensured that these plans are now more transparent and attractive to policy holders.  One should go for these if you are clear about your current and future financial goals, risk averse and with a clear and mature understanding of your finances.

ULIPs, meanwhile, are dynamic and flexible financial instruments that can be custom-made and altered even during the tenure of the plan.  Along with life cover, ULIPs also come with in-built range of fund options – aggressive funds that are heavily invested in equity and seek to appreciate capital, or conservative funds that are invested primarily in bonds, cash and money markets; they seek to protect capital.

Let’s look at a scenario here – 22-year-old Alok works with a multinational firm. He has limited liabilities and no dependents. At this stage, it would suit Alok to opt for a ULIP with higher exposure to equity markets, and exercise the option to customise his plan to reduce risk and increase insurance cover later. With age, comes marriage, car or house loans, children, their education, or even family vacations and his financial responsibilities and debt burden rise and benefits of ULIP can kick in.

However, if Alok were a 35 or 45 year old he might opt for a plan that provides his family financial security in an event of his untimely demise. A traditional plan which offers savings, security and protection cover or a pure term plan would be a better option.

Therefore, regardless of age or income level, there is an insurance plan out there for everyone. It is up to you to consult with an expert financial planner to decide what works best for you.

By Tarun Chugh, MD & CEO, PNB MetLife