Life insurance has long been perceived as an instrument for tax saving and investment rather than a cover for one’s life. For most people, the chief concern is the return they get on the investment, not whether they are able to cover their lives adequately.

Ironically, therefore, life insurance becomes an add-on benefit for the majority of people buying life insurance policies. Now, that’s a less than ideal state of affairs. Ideally, one should ensure that his dependants are adequately provided for in the event of something unfortunate happening to him. This can be easily done through a term insurance policy, offered by all insurance companies.

In a term plan, in case of the death of the policyholder during the period of the policy, the nominee gets the cover amount, commonly known as the sum assured. However, there is no payout if the policyholder survives the period of the policy. This aspect of term insurance does not go down well with individuals.

But, the point to remember is, you are insuring yourself against emergencies by paying a premium and not trying to make money out of it.

All the same, most insurance companies and their distributors do not push term insurance policies actively.

Distributors do not like to sell term insurance policies because the commissions they make on it are very low in absolute terms. Companies, on the other hand, like to sell unit linked insurance plans (Ulips) primarily because they can charge the investor ‘management fees’.

Ulips provide capital appreciation through investments in various schemes in debt and equity markets, much like mutual funds. Where they differ from mutual funds is in the insurance cover they also offer.

Although this sounds like a good idea, the high costs associated with such complex products could bleed you dry immediately after you pay the first premium. Upfront loads are huge for the first few years, tapering off towards the end.

Thus, exiting a Ulip at an early stage becomes an unattractive option. Another matter of concern is the relative underperformance of Ulip schemes vis-à-vis their mutual fund peers and the benchmark index. Instead, as an investor, you are better off investing in equity mutual funds that have far superior cost structures and liquidity. It is very easy and inexpensive for investors to get out of mutual funds scheme not performing well.

Investors should note that a switchover between Ulips of different insurance companies can turn out to be a very expensive proposition. Thus, once you opt for a Ulip of some company, you generally stay put with them for good. This is unlike mutual funds where you can easily switch between the schemes of different fund houses in case a scheme underperforms.

Worse, most Ulips do not even disclose the details of their fund management and portfolios to the investors.

If you wish to avail of an insurance cover, it is best that you opt for a term cover. The advantage of term plans lies in the fact that you can insure yourself by paying very low premium amounts. As premium amounts are lower, you can easily avail a higher insurance cover.

Of course, the premiums paid are not returned when the policy terminates. However, the money saved due to difference in premium amounts if invested in mutual funds would more than make up for this loss.

Let us compare the cost structures in case of a Ulip with those in case of someone combining a mutual fund with a term cover.

We have taken actual Ulip and mutual fund schemes for the comparison (see table). It is assumed that the amount paid yearly is Rs 1 lakh, age 24 years and the life cover Rs 10 lakh.

Policy Total Total cost in Excess term cost MF &term cost in in Ulip cover (Rs) Ulip (Rs) 10 years 71,320 53,500 33% 15 years 98,620 80,250 23% 20 years 129,920 107,000 21% The table illustrates the cost in-effective structures of Ulips, which makes them an unattractive and faulty insurance product.

What’s more, a majority of Ulips gives holders either the sum assured or the value of the units held, whichever is greater in case of death. In case of ‘mutual funds + term insurance’, one avails the benefits of both; fund value and the sum assured in case of death. Some Ulips offer both these benefits, but their costs are even higher than mentioned above.

If, by any chance, you have already entered a Ulip, there is very little you can do. However,making sure you are fully invested in equity throughout the policy term can help you maximise your returns and cut short some losses.

A useful rule of thumb here is that a 2-2.5% cost per year on asset management is par for the course - anything higher should be shunned. If the loads on your future premium payments in Ulips are lower than this, you might as well stick on. Mutual funds typically have loads in this range, so they are useful investment options.

Source : DNA