The Hindu Business Line : Choosing between insurance and investment products

Risk profile and investment objectives differ with each person. You have to do a bit of analysis
to see if the ‘combo’ product offered by your insurance agent fits your profile.

Rajalakshmi Sivam

If you have plans to invest in an insurance product, are you confused about whether to take a pure risk-cover (a term plan) or an investment (ULIP)-oriented one? Well, at the initial stages of career when your salary has just inched into to the taxable slab, you can’t take chances because every penny matters. Risk profile and investment objectives differ with each person. You have to do a bit of analysis to see if the ‘combo’ product offered by your insurance agent fits your profile.

Two options

At the age of 25-35, if you’ve plans to acquire or have already acquired assets such as a home or a car, your financial commitments may be high. Yet you may want to invest for the future and set up a risk cover on your life so that your family is taken care of, in the event of your demise.

With the monthly surplus oscillating, you can’t take up a high financial commitment every month or even every year. This makes it necessary for you to choose your investment/insurance option cautiously so that it doesn’t pinch your pocket later.

You can achieve your objective through two means. You can take exposure to a ULIP (a unit linked insurance plan) that combines a life cover with investments in stocks and bonds. Or you can invest separately in a term policy and mutual funds of your choice to meet your two key needs. A cost-benefit analysis should help you decide on the right option.

Insurance

Insurance companies offer a multitude of variants to the basic life insurance product. A life insurance policy could be a term policy or endowment policy or an ULIP. A term policy is a basic policy that offers a risk cover based on the premium paid by the policy holder. In the event of death of the insured during the term, his family gets the sum assured on the policy. You stand to receive nothing if the risk (in this case, death) does not materialise. A term policy could be the cheapest insurance option for youngsters. An endowment policy differs from the above on grounds that if the insured survives the term, he would be given a sum assured plus a bonus for the investment he made over the years. But do note that the premium on endowment policies is much higher than on a pure term policy because of the savings element.

Mutual Funds

If you take the term policy route, you may like take care of your investments though mutual funds. Mutual fund houses offer a host of open-end funds which can be plain vanilla or focussing on specific themes and market cap segments. Low costs (annual charges of 2.5 per cent or less), transparency an good liquidity (you can sell units whenever you want) are the key advantages of mutual fund schemes.

ULIPs

An ULIP (Unit Linked Insurance Plan) is an option that combines the features of a mutual fund and an insurance scheme. The premium paid by you would entitle you for a life cover and for returns from a portfolio created with your premium payments. The insurer here pools the premium collected from the policy holders and invests it in the stock or debt markets. The investors are also given the option of choosing between debt, equity or a combination of both. Though ULIPs might look like an attractive option, the proportionally lower allocation for investment in the initial years of the policy due to expenses and the relatively high premia, are their key limitations.

The annual premium on an ULIP would typically be several times that on a pure term policy because of the investment component. Based on the specific product, a good portion of the first year premium could also be deducted towards charges — initial administration charge, regular administration charge, policy administration fee and fund management charge, which be as high as 25-30 per cent in the first year and fall from the second year. These reduce the corpus invested on your behalf and moderate the final returns. ULIPs usually have a lock-in period of a minimum three years. This limits your ability to redeem units for a financial emergency. Investors also need to compare features across products before zeroing down on a specific investment option.

So don’t just commit yourself to a hefty premium because your insurance agent pushed you. Sign on the dotted line, only after you do your homework.

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