Which Life Insurance Policy Should You Buy?

Life insurance is an essential part of one’s financial plan; and like any other product, there are several options one can choose from. There is no one-size-fits-all option, and what may be right for one may not be so for others.

So, it’s important to understand the three broad forms of life insurance —term plan, traditional and endowment plans, and unit-linked insurance plans (Ulips)—and how they are different from each other.

Term Plans: The Purest Form Of Life Insurance

This is the purest form of life cover as it insures only the risk to life.

Says Karthik Chakrapani, chief business officer (CBO), Pramerica Life Insurance: “Term insurance is considered the bedrock of financial protection because it provides a pure, unadulterated safety net for your loved ones. It replaces the current and future possible income of the breadwinner in the event of an untimely demise, ensuring that the family’s financial goals like education, housing, expenses, and long-term security remain uncompromised.”

So, it’s important that a term plan is adequate to cover these expenses in your absence. “The basic hygiene would be to choose a cover that is 10-15 times your annual income, considering current liabilities, future costs such as education, and inflation,” says Rajeev Chugh, chief financial officer (CFO), Future Generali India Life Insurance.

Traditional Plans: For The Conservative Policyholder

Traditional life insurance plans, such as endowment and guaranteed return plans, offer a mix of life cover and assured savings. They guarantee a fixed maturity amount—either as a lump sum or in staggered payouts.

Says Vivek Jain, CBO, life insurance at Policybazaar, an insurance aggregator: “These plans are best suited for the risk-averse who want capital protection, or have specific life goals, like funding a child’s education, or who prefer a forced savings mechanism for disciplined investing.”

A key attraction is the tax benefits. The maturity proceeds are tax-free under Section 10(10D) of the Income-tax Act, 1961, if the annual premium is Rs 5 lakh or less. This makes them particularly attractive for individuals in higher tax brackets looking for safe, post-tax-efficient returns. Like term plans, premium contributions are exempt up to Rs 1.5 lakh under Section 80C, under the old tax regime.

Says Chakrapani: “These plans operate on the principle of prudent capital allocation. A portion of the premium secures life coverage, while the remainder is invested in stable, fixed-income instruments.”

For instance, for a 35-year-old individual with an annual premium of Rs 1 lakh for a 20-year tenure, the plan may offer a guaranteed sum assured of, say, 5 per cent each year.

However, one should remember that guaranteed returns mean that the returns are lower, and more often than not, they will not beat inflation. That’s not because they invest in fixed-income instruments, but because the costs in these plans are also high. Nevertheless, they ensure guaranteed benefits and long-term stability—a benefit that many risk-averse customers appreciate.

If you are trying to meet your life’s goals just through these plans, it may not be a great idea, but they can form the debt portion of your portfolio.

Ulips: Protection With Growth

Ulips are market-linked insurance plans, and high cost and instances of mis-selling in the initial decade or so of their launch gave them a bad name.

However, they have witnessed a dramatic transformation of late. Regulatory reforms have resulted in lower costs, increased transparency, and superior fund performance.

Says Mainak Adhikary, head of operations, Go Digit Life Insurance: “The Insurance Regulatory and Development Authority of India (Irdai) has capped the management charges (either percentage-wise or absolute amount), and fund value (illustration) at 4 per cent and 8 per cent, respectively, and the same should be mentioned in the benefit illustration. Insurers also have to issue a fund performance letter on a monthly basis.”

Ulips have become more investor-friendly today, particularly suited for long-term goals like retirement or asset accumulation. Says Chugh: “Equity-linked Ulips are increasingly on a par with mutual funds and benefit from the added protection offered by life insurance cover.”

Adds Jain: “A lot of new-age Ulips come with zero premium allocation charges, zero administration costs, and even offer return of mortality charges at maturity, making the overall cost structure low.”

An added advantage is tax efficiency. For annual premiums up to Rs 2.5 lakh, maturity proceeds are completely tax-free under Section 10(10D). In contrast, mutual funds attract 12.5 per cent long-term capital gains tax on returns above Rs 1.25 lakh annually. This has made Ulips a highly competitive investment option.

However, one should remember that Ulips are insurance products and should not be seen as an alternative to pure equity instruments. Besides, the tax deduction attraction remains only for those in the old regime.

What Should You Do?

Term plans are a must buy for those with dependants. You should ideally buy term plan early in your working years. It provides pure protection, and locking in a higher cover when you are young means lower premiums for the entire term. With increase in income, you should enhance your coverage.

Ulips are good for those looking to grow their wealth through market-linked returns. Says Jain: “Younger individuals can benefit from long-term equity compounding, while even older investors can use Ulips for retirement planning by shifting to debt funds as they near their goal. The flexibility to switch between funds and the tax-free maturity makes them a smart long-term investment tool.”

Traditional guaranteed return plans are ideal for conservative investors. They lock-in guaranteed (debt) returns for as long as 20-30 years, regardless of how interest rates or markets move. But as mentioned earlier, one may have to deal with subpar returns, which do not beat inflation, so having one’s entire corpus in such plans may not be a wise idea.

Choose a traditional plan or Ulip depending on your risk appetite but also consider other debt and equity options in the market for comparison.

A term plan with adequate coverage and investment in equity instruments remains one of the best ways to create wealth and meet long-term goals.

meghna@outlookindia.com