1. Term plans look cheap in the first year. If one were to consider the overall premium paid, it will be quite a lot of money. In the given instance, the total premium outflow would be Rs.238,750/-
2. There has been repeated lies uttered by the armchair financial advisors and newspaper columnists about the commission earned by the agents on term plan and ulips. In the example taken by this author, the term plan commission earned by the agent is Rs.3343 in the first year. By the time 25 year period is thru, the agent would have earned Rs.15,280. On the contrary in case of ULIPs, over the three year period one is required to pay the premium, commission earned by the agent is Rs.7,916. Roughly about half the total premium earned.
3. In case of ULIPs, even in the worst case scenario of the fund generating a return of 8% over a 20 year time period, the initial three premiums paid is more than sufficient to cover the life insurance. But considering the fact that the fund managers of ULIP are also investing in the same equity market where the MF fund managers are putting the money, it is likely that the real rate of return would be around 15% . In this scenario, a person who would have taken the ULIP, will enjoy uninterrupted life cover as long as he wants PLUS also takes home a substantial amount of money.
4. In case of term plans, if one premium is missed the policy lapses. During the lapsation period, if the person dies, nothing is paid to the family.
RE:Term plans and the real story...
by natraj tanjore on Dec 07, 2007 11:58 PM Permalink
You are forgetting one important factor! The term insurance scores heavily in case of death in the first five to 10 years of the policy, which isnt the case of ULIPS. And insurance is supposed to cover an eventuality and not give u investment returns. So it is always better to take a term cover and invest the balance amount of premium (which u would have paid on higher terms for whole life / ulip insurance) in Systematic investment plans.
RE:RE:Term plans and the real story...
by natraj tanjore on Dec 08, 2007 12:02 AM Permalink
Also the term insurance is ideally suited during the periods when your family is very vulnerable! i.e. when the kids are below the age of 16! In such cases the term insurance amount also would be lower as your age at the time of taking cover would be in early 30s and premiums are better for under 40s. The advantage of term insurance is that u take the cover so long as u are financially insecure / inadequate for an eventuality. The moment your insecurities are taken care off, one may / may not continue!
RE:Term plans and the real story...
by Manoja on Dec 08, 2007 11:02 AM Permalink
Mr.Natraj Tanjore,
Let us look at it this way. A person takes a ULIP when he is 25-30 years of age. What are the probabilities that death will happen in the first 10 years??? Barring accidents, I would say this scenario is very minimal. Considering the high pressure jobs we have and the unhealthy lifestyle we carry on, the body would have taken its toll by the time one gets into the forties. This also the time when the kids are getting into their teens and responsibility is highest.
So consider this scenario. If this person has taken a ULIP when he is 25-30, in the first three years he has completed his requirment of paying the premium. After this period of three years are over, he can then shift the ENTIRE premium that was being paid under the ULIP to either the MFs or eqyuities. And to top it all, he need not worry about paying the insurance premium every year and live under the constant fear that if the premium is not paid, the policy would get lapsed!!!
Again, in the case of ULIP, higher the value of your investment, lower the premium charges which is not the case with term plan. Here the premium remains constant thruout the period of insurance cover.
I agree, insurance is only a risk mitigating tool and should not be used for wealth creation. But when there is an opportunity to have the best of both the worlds, why not????
