The Indian insurance sector saw a proliferation of customer-centric insurance products after it was thrown open to the private sector in 2000.
Mr. V Viswanand, Director and Head, products and persistency, Max New York Life Insurance
The Indian insurance sector saw a proliferation of customer-centric insurance products after it was thrown open to the private sector in 2000. With the entry of numerous insurance companies and increasing competition in the sector, Unit Linked Insurance Plans (ULIPs), which combined insurance with savings, were introduced as an option to traditional insurance plans, which focused on protection with steady savings.
However, before making the decision whether to opt for a traditional insurance policy or a ULIP, an investor has to understand the principles and the way both these financial instruments operate.
ULIPs provide both protection and savings combined with flexibility to investors. These products are market-linked, and have the potential to deliver higher returns. A ULIP investor has the flexibility to switch funds, determine the amount of investment and withdraw funds partially or systematically. ULIPs also provide the convenience of pliable insurance coverage, which can be increased or decreased at any time. However, the ULIP policyholder needs to be more involved as the investment risk rests with him.
Traditional insurance plans
Traditional insurance plans, which include term, endowment and whole life policies, offer multiple benefits in terms of risk cover, return and safety. Traditional policies are considered risk-free, as they provide fixed returns in case of death or maturity of the term. Investment guidelines also ensure safety of funds with a cap on equity investment.
Traditional Participating plans are the most popular category of traditional life insurance products. Though it is popular in Indian market for many decades now, there is still lack of understanding about these products. Participating plans provides the policyholder 90% share of surplus whereas 10% is the share of life insurer. This sharing mechanism aligns the intent of both the policyholder and the life insurer as high investment surplus will drive higher returns for both parties. In participating plans as the investments are primarily in debt instruments, the returns do not have the volatility generally witnessed in market linked plans. Traditional participating plans are truly protection oriented financial instrument as it has a strong sum assured orientation along with consistent returns.
In a young economy like India, where a large share of population is in 20s and 30s, traditional plans are seen as slow and opaque. There are some myths around these plans.