Life Insurance - Traditional or Endowment Policy vs Unit Linked Policy | Life Insurance

After privatisation of Life Insurance companies, many companies has come up with unit linked insurance policies. Lets look at some of the advantages and disadvantages of Unit Linked and Traditional insurance policy.

Cash Value or Return

In case of traditional policies, insurance company declare bonus every year. Once bonus is declared, it becomes vested or guaranteed. Although, customer do not get this bonus immediately, but insurance company keep it with the policy fund and this amount does not change with economic conditions.

In case of unit linked policy, return is not guaranteed. Premium collected is invested in stock market or other options like a mutual fund and return is market dependent. In case of an economic crash, return can be even significantly lower than premium paid.

Insurance Charges

Insurance charge or risk premium on traditional policy is fixed over the tenure of the policy. Where as in case of unit linked, risk premium increases along with the increase in age of the policy holder.

Transparency

A reason why unit linked policy enjoys a favour from Indian investors, is greater transparency in terms of premium utilisation. All charges deducted from the premium are detailed in the policy documents. Premium paid minus charge = the amount invested to purchase units. A customer can evaluate his corpus any time by checking the unit value x number of unit purchased.

Traditional policies, on the other hand, don’t reveal much. They may or may not disclose their charges. Here the investable surplus of all investors is pooled together and is managed by the fund manager. So the individual investor can’t know what his individual investment is worth at a given point of time. He is also not told where the money is invested.

Conclusion

We believe, for an average investor, traditional policy will be a better option than unit linked policy. Reason behind this are - traditional insurance policy are for long term and compulsion to pay the premium force an individual to save a certain amount every year. This is the biggest advantage for people, who find it difficult to save regularly in these days of hyper consumerism.

On the other hand, mutual funds are better alternative than unit linked policy. There is no entry load in mutual funds now a days, where as Unit Linked Policies charges can very from 10% to 70% of the first year premium, depending upon the company and the specific policy. A better alternative of unit linked policy is to take a pure term loan from from an insurance company and invest rest of the money in mutual funds. In these way, charges will be less and protection will be as required by the individuals need.

Another drawback of unit linked policy is mis selling. Due to high flexibility of these policies, in can be twisted in such a way, which may look very promising. Most of the time it happens in term of return expectations. People tend to sell the policy as an guaranteed return policy and sometimes, charges are hidden in such a way, in naked eye, it is not visible. So, if you are interested in unit linked policy, go through the product brochure, so that, there is no misunderstanding between the agent and you.