Have you fallen prey to traditional plans?
Ronak Morjaria, Research Analyst, Apnapaisa.com
Do not fret. You are not the only one…there are many like you. Inspite of media putting its might to spread financial literacy, we end up buying plans which turn out to be dud products later. And traditional plans are one such product.
People are unaware of where their money (premium) is invested, what returns they are going to earn on it and most importantly how much is the life cover (sum assured) in these traditional plans. Today if you ask someone how much life insurance cover you have, his answer will be “I pay ‘Rs.XXX’ premium every year”. Majority of the people have the same answer. The reason behind this is mis selling done by the insurance agents or bancassurance executives. The traditional Indian psychology to receive something in return after paying the premiums for certain period is also one of the reasons why people buy traditional plans and not pure term plan.
People are misled with the benefit illustration shown to them by the insurance agents with expected return on the policy ranging from 6% to 10%. People get influenced by looking at the large number – the maturity amount which is assured to them and they assume that they will receive such amount in the future. I know people who have been sold a number of endowment policies with different maturity periods as a retirement plan, with a promise to provide regular income after a specific age. Bancassurance executives sell expensive traditional insurance policies not only to common people and but also to HNI clients who do not have much knowledge about such plans.
Moreover agents/ executive know that insurance is a long-term contract and it is quite unlikely that client will be in touch till the insurance policy matures. Also the executive himself is not going to work with the same bank for such a long period. People are also unaware that the tax benefit is available only if the life insurance cover is 10 times of the annual premium, as per the financial budget 2012-13. Few traditional plans with limited premium payment option do not satisfy this condition.
So on which premise these plans are being sold?
In most of the endowment or child plans you get the sum assured along with bonus. The insurance company depending on the performance and the growth of the insurance company declares the bonus rate every year. In pension plans, you have to compulsorily buy an annuity of minimum 67% of the accumulated corpus under the policy, throughout the policy period. The bonus rate is declared in per thousand terms and it gets accumulated every year throughout the policy period. On an average basis, the IRR (Internal Rate of Return) on such policies are not more than 5% to 6% returns. Are you happy with such returns? Does this return beat inflation rate? Will maturity amount suffice to meet the goals like child’s education and marriage or your retirement, for which you had bought the policy?
What should you do if you have already bought traditional insurance policy?
You should review the plan on the basis of surrender value today; future premiums payable and approx. maturity value and calculate the IRR. If the returns are poor, i.e. below inflation rate, then you should consider surrendering the policy, else you should continue the policy and keep it as a debt portfolio. You should surrender it even if you are making a loss by surrendering the policy now.
What should you do if you already have a traditional plan?
You should buy an online term plan for yourself, since the premiums are cheapest here. The online term plan covers the risk of death only. Thus, the sum assured is paid only incase of death of the policy holder during the term of the policy. As a thumb rule, you should have life cover equal to 10 to 12 times of your annual income. The balance amount left, as surplus should be invested in Equity MF, PPF or gold for building corpus for your financial goals.
You should never mix insurance and investments by buying traditional insurance plans. You should stay away from fancy traditional insurance policies and shouldn’t get carried away looking large numbers and fall prey of such policies.
It is always better to seek professional advice for calculating your exact insurance need and reviewing your existing insurance and investments. This will go a long way in meeting your financial goals.
ApnaPaisa is India's leading Online market place for financial products such as loans, credit cards and insurance plans. Author can be reached at www.facebook.com/apnapaisa.