Nov 03, 2011 04:24 PM IST | Source:

A la carte ULIP vs buffet endowment

WE live in a made-to-order world. Menus or travel plans, everyone promises one thing: a solution that suits you.

WE live in a made-to-order world. Menus or travel plans, everyone promises one thing: a solution that suits you.

But one thing that needs customisation beyond all else is financial planning.

Fun thing is, you can do it by yourself. For free. All you need is some know-how.

Insurance is one of the biggest questions to someone planning finances. There is too much happening much too soon. From a country with one insurance provider offering simple risk covers, we have evolved to nearly 16 players and more to come with hundreds of options.

If you want to take an insurance decision that works for you, you might want to read on.

Take our reader, 25-year old Suchintya. She earns Rs 36,000 per month. She does not have any dependents. But she envisages marriage for herself as well as plans to support her parents.

Should she opt for a Unit Linked Insurance Plan or a traditional policy? Should she look for a term or whole life policy?

Before we answer Suchintya's query, here are a few basic facts.

~ A ULIP offers the twin benefits of life insurance as well as an investment. After deducting fees and charges, part of the premium paid goes towards buying insurance cover.

The balance is invested in the funds you choose. You can also track the performance of the fund since returns are linked to market performance. Thus, ULIPs provide protection and flexibility in investment.

~ Traditional policies work along the same lines. Part of the premium is set aside for life cover. The rest is invested in a fund after charges are deducted. The difference is, you don't know the break-up, performance or the manner in which your returns are paid out.

The returns are in the form of bonuses but you don't know if the profits from your fund will be paid to you or only a share will. Go for an endowment policy, an option within traditional policies which covers life and offers maturity value at end of term.

Pranav Mishra, Senior Vice President, ICICI Prudential Life Insurance, says, "The essential difference in the two plans is, traditional policies encourage savings; ULIPs take the investment path and hence have higher growth options."

Make the choice
Sanket Kawatkar, Senior Consultant, Insurance and Financial Services, Watson Wyatt Worldwide, feels the choice between the two is a matter of control, "ULIPs give offer a choice of funds for the risk averse and the aggressive investor, but traditional policies take the investment decisions themselves. Though they many guarantee some returns by way of bonuses."

Back to Suchintya. Since she is young and has a long investment horizon, she can depend on equity for good returns in the long run. "Investment in ULIP with equity investment options should be better for her than that of traditional investment option," says V Ramakrishna, MD, India Insure Risk Management & Insurance Broking Services Pvt Ltd.

It is that simple. You don't need to pay for customised financial planning if you know the basics.

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