Growth option in Ulips suitable for younger policyholders

Published in Mint on 17th March 2015, Written by Abhishek Bondia

What is the ideal duration of a term insurance policy?
—Harish Sathe

A term life insurance policy should be taken to cover the prime income generating years of an individual. Death in these years causes the dependants of the individual major loss in terms of source of income. Worse still, they may inherit liabilities such as loans. Typically, by the age of 65, a person has fulfilled her major obligations such as children’s education, mortgages and so on. It is also a common retirement age. It is recommended that you cover yourself up till the age of 65. The duration of the policy should be 60 less your current age.

What are the risks associated with investing in the growth option of a unit-linked insurance plan (Ulip)?
—Kishore

Ulips offer several funds to invest into. These funds differ in terms of their investment in equity, debt and liquid asset classes. Of the three, equity generates the maximum return in the long term but also carries the most risk. Growth option in a Ulip typically refers to investing a larger portion in equity. The risks associated with the growth option are similar to investing in equity mutual funds or directly into the stock market. The principal is not protected. In a bad market year, the value of the fund can go lower than the total premium paid. As a rule of thumb, younger people should select the growth option. People approaching retirement should opt for the more conservative debt funds where the volatility is lower even though expected returns are lower.

Can I change the insurer in the middle for my term policy?
—Bindu Narayanan

Yes, you can. However, the same policy is not carried forward. Your previous policy will lapse on its own. And, you will need to enter into a new contract with the new insurer. The suicide exclusion will re-apply for the first year. In some cases, after your financial underwriting, the new insurer may insist that you surrender the previous policy. I would recommend to definitely evaluate the cost of buying a new term insurance at the time of renewal of the previous policy.

Could you tell me what is the free-look period of life covers?
—Damini N.

Insurers offer a free-look period of 15 days to every new policy holder. It is a no-questions asked return period. The insured can return the policy within 15 days of receiving the hard copy. The insurer is obliged to return the premium amount less administrative and risk related expenses. This is a compulsory feature of all life insurance policies mandated by Insurance Regulatory and Development Authority of India. The rationale behind such a feature is to curb mis-selling. Policyholders get an opportunity to review the contracts and see if it’s in line with what they expected. The free-look period starts from the day the policyholder receives the contract.

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