In unit-linked life insurance plans (Ulips), a significant portion of the premium gets invested in both debt and equity markets. Those opting for such policies often favor growth funds since they allocate 60-80% of the fund to the stock market, offering the potential for higher returns. In contrast, non-linked insurance products invest no more than 15% in equities, with the rest going into various debt instruments.
Both linked and non-linked insurance products include a life insurance component, but it’s crucial to grasp the extent of that coverage. In Ulips, policyholders receive a risk cover equivalent to 10 times the annualized premium. So, if you pay Rs 50,000 annually, you have a risk cover of Rs 5 lakh. Conversely, a person around the age of 30 who pays Rs 50,000 for a pure protection plan can secure a risk cover of at least Rs 2 crore. Even with a traditional endowment plan (with profits), one can obtain an insurance cover of at least Rs 15 lakh. Over a 20-25 year term, the policy’s maturity value will be no less than Rs 40 lakh based on the current rate of bonuses offered by leading insurers.
A Limited Insurance Component
It should be evident to policyholders that Ulips provides relatively limited insurance coverage compared to the premiums they collect. The same premium amount can purchase significantly more insurance coverage under non-linked products. Since the primary goal of life insurance is to provide as much financial protection as possible at the lowest possible premium, it makes sense to first consider non-linked products and only contemplate purchasing Ulips once adequate insurance coverage has been secured. If an individual can afford to pay an annual life insurance premium of Rs 50,000, they deserve more than a meager Rs 5 lakh insurance cover.
While there’s no harm in purchasing an Ulip and expecting ‘high returns’ from the product in the near term, it’s essential to recognize that life insurance is primarily intended to offer reasonable insurance coverage based on an individual’s Human Life Value. Relying solely on Ulips and neglecting other conventional products may not be a wise financial decision.
Life insurance products play a crucial role in financial planning at various life stages. When income is low and liabilities are high, term insurance can be the best choice. As income grows substantially in later years, individuals should aim to save adequately for post-retirement days, with endowment and whole-life plans providing various living benefits. Deferred annuity plans can ensure a series of passive incomes during post-retirement years. Ignoring these products and exclusively purchasing Ulips could introduce additional risks into an already uncertain and risk-filled life.