Term insurance policies are policies where you need to pay the premium for a predetermined period and enjoy the benefits of the policy for a long time. ICICI Prudential Term Plan is a term plan that lasts anywhere between five to thirty years depending on the age. The premium is calculated based on the age, gender and smoking habits. For a 23-year-old non-smoker, female, for a life cover of Rs 1 Cr, the premium is Rs 5,941 for 30 years. The premium is to be paid for the entire term of 30 years to enjoy the insurance coverage. The insured receives a lump sum amount after the end of the term depending on the terms and conditions of the policy.
Endowment Plans and ULIPs
Endowment Plans differ from term plans in one critical aspect i.e. maturity benefit. LIC New Endowment Plus Plan comes with a yearly premium of Rs 20,000. The sum assured for this policy is 10X or 105% of the premiums paid, whichever is higher. They pay out the sum assured, along with profits, in both scenarios – death and survival.
ULIPs are a variant of traditional endowment plan. HDFC Life ULIP Plan comes with a yearly premium of Rs 12,000. The sum assured for this policy is 10X of the premiums paid. The policy term is 5-20 years. They pay out the sum assured (or the investment portfolio if it is higher) on death/maturity. ULIPs look similar to mutual funds but the fees and expenses in ULIPs are higher than mutual funds.
Why is Term Plan the Cheapest?
Below is the table that shows insurance type and the premium charged for Rs 1Cr cover amount. It is clear from the below table that term insurance policies are the cheapest and provide large life cover.
|Name||Inception Date||AUM (Rs Cr)||Returns for last 5 years (%)*||Worth of Rs 5,000 SIP since the last 5 years (Rs)**|
|Mirae Asset Emerging Bluechip Fund||July 9, 2010||7,271||22.35%||4.79L||Invest|
|Canara Robeco Emerging Equities Fund||March 11, 2005||4,675||21.60%||4.43L||Invest|
|SBI Small Cap Fund||September 9, 2009||1,992||24.97%||4.65L||Invest|
|Reliance Small Cap Fund||September 16, 2010||8,050||21.08%||4.35L||Invest|
|Kotak Emerging Equity Scheme||March 30, 2007||4,028||18.98%||4.17L||Invest|
Term plans are considered the cheapest of all the life insurance policies. This is because apart from the premium, there are no hidden charges in it. The premium in term plans is low and they also provide a large insurance cover than ULIPs and Endowment plans. On the other hand, ULIPs and Endowment plans have various charges.
ULIPs have a high premium. They offer investment in mutual funds along with insurance, therefore, there are many charges towards these. The charges on ULIPs are funds allocating charges, fund management fee, policy administration fee, fund switching charges and agent fees. Endowment plans also offer investment. They also come with a high premium. They have mortality charges and agent fees. Also, the profits of ULIPs and Endowment policies are linked to the market. They along with life cover offer maturity benefit. But the profits are given to the end user only after deducting these charges.
The need for insurance should not be mixed with the goal to invest. Financial experts suggest that invest according to the financial goals and do not mix insurance with investment. ULIPs and Endowment plans are a mixture of insurance plus investment but they do not serve the purpose of both to the full capacity. The life cover provided by them is less than term plans. They don’t invest the intended amount in the market as they have various charges attached to them.
In case, you are looking for investment and insurance. I would suggest you go for a pure insurance product like term plan and invest in mutual funds or equity market for better returns. Instead of paying a high premium under the ULIP and Endowment plan, go for a term plan and pay less premium. And invest the difference in ELSS mutual funds or mutual funds. This will ensure your tax saving is done and your investment is taken care off too.