Published in Mint on 29th January, 2018. Written by Abhishek Bondia.
I have accumulated about four traditional life insurance policies. I want to reduce these so that the sum assured from these policies is about Rs50 lakh. How should I decide which policies to do away with?
Traditional life insurance policies typically have low surrender value. If a policy is about to mature in a couple of years, then it would make sense to continue with it to minimize your loss. If you have recently started with a long-term traditional product, then it would make sense to discontinue this first. Some of the insurances also have the option of partial surrender. If your insurances allow this, you can withdraw some cash and lower the sum assured.
Why should I consider buying a life insurance pension plan when there is an option to invest in National Pension System (NPS)? Are the returns or tax benefits any different? Is there a difference between a Ulip and an endowment pension plan?
—Name withheld on request
NPS operates as a fund, where you can determine your exposure mix towards equity and debt, and choose a fund manager. The charges of NPS are lower than for life insurance plans. NPS is also eligible for an additional deduction over and above the Rs1.5 lakh available under section 80C (of income tax Act) for life insurance plans.
A unit-linked insurance plan (Ulip) has a few advantages over NPS. It provides a small death benefit, gives flexibility to choose higher equity exposure and can be surrendered before the policy term. DEATH BENEFIT IS NO LONGER COMPULSORY I THINK. MOST PENSION PLANS DUE TO GUARANTEED RETURN DON’ HAVE HIGH EXPOSURE TO EQUITY ANYMORE. AT BEST 60% I THINK. SURRENDER MEANS YOU STILL HAVE TO COMMUTE A LARGE PART OF THE CORPUS.
Endowment plans generally have a much higher cost structure, with little flexibility to choose the equity-debt mix and have high surrender charges. I THINK WHAT WE SHOULD SAY IS THAT NPS IS BETTER HOWEVER THE ADVANTAGE THAT PENSION PLANS BY LIFE INSURANCE COMPANIES OFFER IS THAT ON MATURITY THAT ENNTIRE MONEY THAT’ COMMUTABLE IS TAX FREE.
Is there any policy where I can receive money during the tenure of the policy?
A traditional money-back policy returns money during the policy tenure. It has pre-defined streams of payment that fall due before the maturity date. These lump sum payments are expressed as a proportion of the policy sum assured. Remember that absolute returns of such plans are low, between 2% and 5%.
Another option is to invest in a unit-linked plan. These plans are market linked and you need to carefully select the funds to invest in based on your risk preference and the fund’s performance. After 5 years you can withdraw money from your fund value in these policies.
Why is portability not allowed on life policies?
Portability is the transfer of insurance cover from one insurer to another with no loss of benefits. It is most relevant in health insurance where the major advantage is reduction of waiting periods in the new insurance. The years for which an insured had an old policy is reduced from the waiting period of the new policy.
Portability is not applicable to life insurance for two reasons. First, unlike health insurance, life insurance benefits have no waiting period. The only time-bound exclusion allowed is suicide, and that too for the first year. So, lack of portability does not hurt buyers. Second, life insurance is a long-term contract that has surrender charges for foreclosure. This often makes it economically unviable to switch insurers mid-term.