Traditional plans of life insurance cos. are again fancy of the market. Agents/Advisors are pushing these products heavily in the market and the trend shows, the sale of traditional policies is increasing month by month. One side ULIPs commission has come down and on the other, stock market is also under pressure, traditional plans have no competition right now. The market share of LIC has also increased compared to last year because of high sale of traditional plans. Birla Sunlife, which was the pioneer of unit-linked plans in India, also has to come with the traditional plans to sustain in the market.
This article is all about traditional savings plans. Term insurance plans are not saving products, as there is no maturity benefit. Let us first understand what are the features of these products.
Endowment Plan: This is most popular saving product in which sum assured is payable either on death during the term or at maturity i.e. at the end of the term. The compounding bonus is declared every year and is added to sum assured. Bonus is non-guaranteed and depends upon profitability of insurance co. The policyholder has to select term while taking the policy itself. Endowment plan is a combination of term plan and saving plan. These plans are also available with limited premium payment term where by you can reduce your premium paying term. Premium in such plans are much higher than term plan.
Whole Life Plan: The plan name itself says this plan is for whole of life, means the maturity benefit is available after 80 or 100 years. The policyholder can choose the premium payment term to 15,20 or 25 as per his/her convenience. The death benefit is payable till age 80 or 100 as the case may be with bonus declared till date of death. These plans are not much popular now a day, as people would like to enjoy their fund during their own lifetime and particularly after retirement.
Money Back Plan: These plans gives fixed % of sum assured in regular intervals say after every 3 to 5 years and the balance is paid with bonus at the time of maturity. The death benefit is also payable during the term of the plan but all the survival benefits, which are already paid in regular intervals, are not deducted while paying death benefit. The reversionary bonus is also included in while paying death or maturity benefit. Premium in such plan is higher than endowment plan.
Children’s plan: These are also money back type plans but the fixed % of sum assured is payable after child attains the age of 18 years. The parent (Proposer) risk is also covered and in case of death or permanent total disability of parent (Proposer), future premiums are waived off and also the survival and maturity benefits are paid with bonus to the child insured. These plans are sold mainly for education need of the children’s. These plans are also costly as risk cover of both parent and child is covered. Actually, child cover is not required while taking life insurance.
Investment decisions are with the co. in all above plans and the policyholder has no right of any investment decision in these plans. The government has prescribed limits for investment in this plan. 85% is invested in govt. and semi govt., bonds and balance 15% is invested in equity market. One can expect approx. 5% return from these plans. The point is whether traditional plans are investor friendly or they are agent friendly. First we have to agree that our distribution system is agents driven. The agents will sell only those products where they will get more commission. Agents are promoting traditional plans heavily because traditional plans pay 35% commission in the 1st year and 5% renewal commission there after till the premiums are paid. Traditional plans are easy to sell compared to ULIP, as there is no market risk and sum assured and bonus declared are guaranteed.
Traditional plans are neither flexible nor will give good return in the longer run. They also offer less amount of insurance compared to premium paid. There is liability to pay the premium for a longer period. Traditional plans also have their own drawbacks; in case of emergency you pay interest on your withdrawals by way of loan. Any default in premium payments will lead to seizure of risk cover. There are heavy surrender charges if policy is terminated during the term. Most of the people think that there are no charges in traditional plans, but the reality is all charges including insurance cost, office expenses and commission charges are there. The same cannot be identified because they are loaded in premium and not shown separately as shown in ULIPs. The traditional insurance plans neither are insurance plans, as they offer very limited sum assured nor investment products, as they are unlikely to beat the inflation.
After removal of entry load in Mutual Fund and restriction in ULIP charges, it was difficult for financial distributors to survive. Old agents are looking for the alternative income and also new people are not taking financial advisor profession. The fee based practice still far away in India and to stay in the market and to earn bread and butter quality agents also started selling traditional plans aggressively. This has resulted in more misselling. I am not saying that the move was wrong, but without proper distribution system no manufacturer can sell the product in the market. I also strongly believe that traditional plans are more dangerous and are taking away the large chunk of investor’s hard earned money.
The need of the hour is to identify an investor’s need in the first place. Calculate his/her risk cover need depending on his standard of living and all his other financial goals. Then, with all priorities lined up, a detailed financial plan & suggestion has to be conveyed accordingly. Investor must consult paid financial planner so that they can identify the right product, which suits their financial need. Term plans are the best for life cover and is the least expensive plans. Traditional plans also require revision, as done in ULIP and ULP products. We hope IRDA will take some serious steps at earliest to protect the interest of the investors and policyholders at large.
This article first appeared at myiris.com on 16th May 2011
