5 MinsJuly 5, 2021
When it comes to life insurance, the main objective is indemnification of risk to life. In other words, ensuring that a safety net is in place for your family in your absence. But did you know that certain insurance plans may also help you in
addressing life goals?
A term life plan offers a life cover. A sum assured is paid out to the nominees in the event of the death of the insured. But savings-linked insurance plans offer life cover plus a fixed amount when the policy term ends. Let us see how they work:
1) Endowment Policy:
An Endowment Policy offers you guaranteed maturity benefits. Plus, in case of the policyholder’s death, the nominee receives the Sum Assured (SA); thus providing financial security to your family. So, there is a Death Benefit + Survival
A part of the premium paid is utilized towards providing insurance cover, and the rest of the portion is invested in debt instruments and other low-risk avenues. The returns from the investment portion are used to pay the Survival Benefit at maturity.
Some plans offer the option to add riders, viz. critical illness, total disability, accidental death benefit, etc. Besides, a few policies even offer a premium waiver in case of critical illness and total disability. Make it point to choose riders
as part of inbuilt coverage depending on your needs.
Certain endowment policies come as ‘participating plans’, which allow you to participate in the profits of the insurance company, thereby making you eligible for a bonus and potentially build a bigger corpus.
You can opt for a shorter premium paying term than the policy term. You could pay the premium monthly, bi-annually, annually, or even a one-time lump sum amount, thus offering you flexibility.
If you are risk-averse and wish to build a corpus in a relatively safe way, you may consider an Endowment Policy, as it offers the following benefits:
- Indemnifies risk to life and safeguards the financial interest of your family in case of an unfortunate event
- Helps you save regularly and safely and build a corpus for your future needs
- Option to avail of a personal loan against the surrender value of the policy (in between the term of the policy), in case you need money for an emergency before the term of the policy
2) Money-back Policy:
A money-back plan is a subset of endowment plans and offers life cover plus returns. It also offers the option to add riders and flexibility in premium payment options. Money-back plans also invest in debt and money market instruments, making
them suitable for risk-averse individuals, looking for safe investments.
Unlike an endowment plan, a money-back plan allows you to earn some amount of regular income during the policy term. You receive a guaranteed fixed sum (as a percentage of sum assured) at regular specified intervals, which gives you the option
of addressing your liquidity needs during the term of the policy. Since money is paid out at periodic intervals, you can time the payout from the policy to match the time horizon of your goal.
The money-back pay-outs are usually done after 4-5 years (called the pay-out structure) and are a certain percentage (20-25%, varying as per every policy) of the Sum Assured (SA).
The balance of the SA and the bonuses, if any, (revisionary bonus, final additional bonus, and additional loyalty bonus) are paid at the end of the policy term. And in the case of the death of the insured, the entire SA is paid irrespective of
the survival benefit already being paid.
3) Unit Linked Insurance Policies:
Unit Linked Insurance Policies or ULIPs are insurance-cum-investment products that offer market-linked returns and life insurance coverage. Out of the premium paid some portion goes towards insurance, while a major portion is invested in market-linked
instruments. The money is pooled (just as in the case of mutual funds) and units are allotted at certain Net Asset Value (NAV) for investments done.
You have the option to choose the types of fund you wish to invest in—equity-oriented, debt-oriented, or a mix of both (hybrid)––and the investment is made at the respective NAV and units are allotted to you.
When you choose an equity fund of a ULIP, your money is deployed in equity and equity-related instruments as per the discretion of the fund manager. If your objective is wealth creation, have a high-risk appetite, and want to address long-term
financial goals, an equity fund is an appropriate choice. Whereas, if you are a moderate risk-taker looking to balance the risk-reward between equity and debt; a hybrid fund allocation option may be considered, wherein around 50-55% of the
investment amount would be deployed in equity and the remaining (45-50%) in debt & money market instruments.
On the other extreme, if you are conservative, have a low-risk appetite, and are addressing short-term financial goals, opting for a debt-oriented fund that invests in bonds, debentures, and other debt and money market instruments would be advisable.
[Also Read: Financial planning tips to save for your future]
Do note that premiums paid for a ULIP usually are subject to the following charges:
- Premium allocation charges (deducted as a fixed percentage of the premium paid to allocate the premium towards the aforesaid funds)
- Mortality charges (for insurance cover under the plan)
- Fund management charges (fee levied by the insurance company to manage the aforesaid funds)
- Switching charges (to switch your invested corpus from one type of fund to another)
- Policy administration charges
- Partial withdrawal charges
Moreover, there is a lock-in period of five years.
Consider the following when buying a ULIP:
- Gauge your risk profile (aggressive, moderate, conservative), investment objective, the financial goals, and the time in hand to choose the appropriate type of fund
- Assess the proportion of the premium that would be invested after deducting the charges
- Check how many times is the insurance cover vis-à-vis the premium paid
- Check your premium paying term compared to the term of the policy
- Check if there is flexibility to shift between the fund types (equity-oriented, debt-oriented, hybrid, etc.) during the term of the policy
- Do not select a ULIP based on its past returns alone, since it is not indicative of the future returns. Consider the risk, the risk-adjusted returns, the performance across market cycles/phases and the portfolio characteristics.
A UILP can offer you the following benefits:
- Save and invest regularly and get life insurance cover simultaneously
- Mitigate the market-linked risk involved as rupee-cost averaging work in your favour with regular investing
- Have complete control as to which type of fund you would like to invest in
- Potentially earn efficient market-linked returns and compound wealth better
There are goal based ULIPs that help you address certain vital financial goals such as your child’s future needs (education and wedding expenses) and your retirement.
In case of an untoward event between the term of the ULIP, the nominee is paid the sum assured (Death Benefit) and the fund value, depending on the type of ULIP.
4) Children’s Insurance Plans:
These insurance plans mainly address the need of securing a child’s financial future, specifically planning for their higher education and wedding expenses by potentially countering inflation. Children’s Insurance Plans could be endowment
plans or ULIPs. Choose depending on your risk appetite, investment objective, and the time horizon for the goal.
At the end of the policy term, the insured receives a lump sum amount called the Maturity Benefit. Certain types of Child Insurance Plans also allow partial withdrawals (subject to certain conditions) and a loan against the surrender value of
In the case of the death of the parent, the future premiums are waived, and policy in the name of a child continues to exist.
The benefits of Child Insurance Plans are:
- A comprehensive maturity benefits along with a life cover to financially secure your child’s financial future
- Option to avail a loan against the policy’s surrender value is available
- Ability to waive off the premium in case of the parent’s demise
The premium paid for a savings-linked insurance plan will entitle
you to a tax benefit, i.e. a deduction of up to Rs 1.50 lakh under Section 80C of the Income Tax Act, 1961.
Moreover, the amount you receive on maturity would be tax-exempt under Section 10(10D) of the Income-tax Act. The Union Budget 2021 has been amended to bring the maturity proceeds from a ULIP with an annual premium over Rs 2.50 lakh taxable –this
applies to all ULIPs bought on or after February 1, 2021.
To complement investment planning with tax planning as well, certain savings-linked insurance policies/plans may be considered. Axis Bank has tied up with leading life insurance companies, such as Max Life Insurance, Life Insurance Corporation of India (LIC) and Bajaj Allianz Life Insurance. Select a plan as per your needs.
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision