Life insurance plans play a very important role when it comes to providing for an emergency fund in case of an unforeseen demise of the person insured. Earlier insurance used to cover only the death risk of an individual at very low premiums in the form of a term insurance plan. Due to absence of returns on maturity, these plans were not very popular and insurers launched guaranteed benefit plans in the form of traditional insurance plans.Read more
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Today, with further evolution, insurance plans are categorically divided into traditional plans and unit linked plans. Both the types are very different in their features and benefit structures and fulfill different requirements. But today we are talking about traditional life insurance plans which are also called guaranteed life insurance plans and their usefulness. Find out whether you need to consider buying guaranteed life insurance plans. This primer aims at providing an insight into whether to consider buying guaranteed life insurance.
Guaranteed Life Insurance plans which are also called traditional insurance plans are those plans which promise a guaranteed benefit payout either on death or maturity of the plan. These plans come in two variants of participating plans and non-participating plans. Participating plans are those which promise a bonus payout. The bonus depends on the profit earned by the company in a financial year and it varies according to the company’s performance. Non-participating plans do not provide bonus.
Guaranteed Additions and Loyalty Additions are also promised under some plans. These additions may accrue either in a participating plan or a non-participating one. While Guaranteed Additions accrue every year for a specified tenure, Loyalty Additions are added after a certain term has elapsed.
What are the Types of Plans Available?
Guaranteed Benefit plans come as Endowment plans or Money back plans. While Endowment plans provide a lump sum payout on maturity, Money back plans provide periodic payouts for enhanced liquidity. A new variant called Monthly Income plans are also available in the market today which are Endowment type plans providing a steady source of monthly income either after maturity or death. You need to ascertain whether to consider these guaranteed life insurance plans.
With a slew of investment products available in the market which provide a good growth option, these plans lose out on their usefulness. The cons outweigh the pros and so many of us give these plans a miss. For a clearer picture, let us consider the pros and cons of these plans in details:
Low returns – The major problem with these plans are that the returns provided are very low. If we factor in inflation, the real worth of the returns falls drastically. Even though bonus, guaranteed additions and loyalty additions promise a substantial return, they are not inflation adjusted and therefore lose out on their real value
Rigid in nature – These plans come with a long-term perspective and also keeps the investments locked in. If you want to withdraw some funds for your financial requirements, you cannot do so without surrendering the policy which would result in loss or taking a loan on the policy which would attract interest.
Higher premiums – Plans which provide bonus or guaranteed additions, always come with a higher premium incidence. Other plans which do not provide bonus or additions are less pricey.
Guaranteed benefits – Though a low return is a setback, the plans do provide a guaranteed return which is good for those who are risk-averse and are looking for assured returns.
Builds a saving habit – Instead of being criticized for having a longer tenure, these plans with their longer tenure actually helps in disciplining you to build a saving habit. By paying a premium for a longer tenure, you actually save regularly for a longer tenure thus building a good corpus.
Whether you like it or not, investors consider buying guaranteed life insurance plans and they do sell in the market. Whether they are good or bad for investment depends on your requirements and perceptions. If you are nearing retirement, you might want to save in these plans and not take the risks of the capital markets. While some of you would prefer other plans for investing rather than these plans.