Insurance is a contract which provides protection against a possible eventuality or risk. So, insurance in its purest form is an expense rather than an investment.
Unfortunately, many of us mix life insurance and investment. We expect Returns from our investment in Life Insurance. Investing in a Traditional Life Insurance Plan is one of the most common personal finance mistakes that many of us commit.
What are Traditional or Conventional Life Insurance Plans? – Traditional plans or conventional plans are the oldest types of insurance plans available. Term Insurance plans, Money-back plans, Whole-life Plans, Endowment plans etc., are considered as Conventional plans. Traditional policies are considered as risk-free, as they provide fixed returns in case of death (or) on policy maturity.
What is an Endowment plan? – It is a combination of insurance and investment. The insured will get a lump sum along with bonuses (if any) on policy maturity or on death event.
What are Money-back policies? – They provides life coverage during the term of the policy and the maturity benefits are paid in installments (at periodic intervals) by way of survival benefits.
What is Whole-Life Insurance Plan? – It is a life insurance policy which is guaranteed to remain in force for the insured’s entire lifetime. The Sum assured is paid to the Policyholder’s nominee in the event the insured dies.
The common thing with these policies is that they provide bonuses to the policyholder. Bonus is offered on traditional plans which are built in to the plan structure. These bonuses can be of different types like Simple Reversionary bonus, Loyalty addition, Final Additional bonus etc., So, traditional plans have two components i.e. i) Life cover & ii) Investment Component.
As discussed above, an insurance provides risk protection. You can get the risk cover by paying a certain amount as Premium. In a traditional life insurance plan a part of the premium goes towards mortality charges (for life cover) and the remaining is invested primarily in Debt or Fixed Income Securities.
(What are Mortality charges? – Mortality Charge is the amount charged every year by the insurer to provide the life cover to the policyholder on the life of the Insured. It is also known as Cost of Insurance.)
As these traditional plans have to pay BONUSES to the policyholders, they have to charge over and above the ‘cost of insurance’. This is the reason why the endowment plans or money-back plans are costlier than the pure term insurance plans.
For example : Arun pays a premium of Rs 10,000 towards his Endowment insurance plan for Sum assured (life cover) of Rs 1,00,000. His Life insurance company deducts a part of this Rs 10,000 premium as the ‘Cost of Insurance’ or ‘Mortality Charge’. This is kept aside by his insurance company and maintains a ‘Life Fund’. This Life Fund is not invested anywhere. Insurance company uses this Fund to pay out Death benefits.
Mortality Charge is usually a very small amount, say Rs 400 p.a. from the Rs 10,000 annual premium that Arun paid for his life insurance. From the remaining amount of Rs 9,600 (Rs 10,000 – Rs 600) various expenses like office administration, marketing expenses, policy maintenance etc. are deducted and the balance amount would go for investment.
Do not blindly go by projected illustrations given by your agents or advisors. A traditional policy may look attractive today by looking at the projected maturity corpus. But, always factor inflation into the calculation. For example: You may be offered a maturity value of Rs 50 Lakhs in 20 years. At 6% inflation the today’s value of it will be reduced to Rs 15.6 Lakh. (Read : What is Time Value of Money?).
Remember this simple point : “Any life insurance plan which pays money before a policyholder dies can be best avoided.” Else you may end up buying costly and unwanted life insurance plans. (Read : How to get rid off unwanted life insurance policy?)
Then, who can buy these traditional life insurance plans? If you already have adequate life cover, would like to safeguard your capital, and OK with lower (or negative , inflation effect) long-term returns then you may consider investing in a Traditional life insurance plan. Even in this case it is not an INVESTMENT OPTION but it is just a long-term SAVING option!
(Image courtesy of jscreationzs at FreeDigitalPhotos.net) (Post published on : 01-July-2016)
This post was last modified on July 11, 2023 11:39 am
Filing your Income Tax Return (ITR) is not just about meeting deadlines—it’s about choosing the…
Retirement planning in India is often misunderstood. Many people think any long-term savings or investment…
You’ve probably seen the same property quoted at different prices. One person says ₹60 lakh,…
Buying insurance is easy. Getting your claim settled—that’s where the real test begins. For any…
Gifting immovable property—like land, plots, or houses—is super common in India. Families often do it…
Most people believe that investing alone is enough to create wealth. But in reality, many…
This website uses cookies.
View Comments
The debt Recovery Agent Certificate course has been developed on the advice of RBI (Reserve Bank of India) by the Indian Banks’ Association, in consultation with the Indian Institute of Banking and Finance (IIBF).
hello sreekanth, i am planing to take term policy if u can advice me which one to take.
Dear Vikesh,
Which is the best Term Insurance plan to buy? – You may take a term plan from any insurance company of your choice, it should not be of any issue. But do disclose all the required information in the proposal form accurately and honestly, that’s it!
“As per the recent amendment to Section 45 of the Insurance Act, if your policy is 3 years old, no matter what happens, the life insurance company will not be able to deny the claims. So, your life insurance company has only 3 years in hand to reject the policy based on any mis-representation or mis-statement. Once three policy years are completed then the life insurance company has to settle the claims and can not reject them.”
Related articles :
* How much Term Life Insurance Cover do I need? | Online Insurance coverage Calculator
* IRDA Claim Settlement Ratio 2017-18 Data | Top 10 Life Insurance Companies based on CSR
* Top 9 Best Online Term Insurance Plans in India
Anna, I got the answer for my comment on another article of yours from this article.. However, I have a small doubt with the last line "Then, who can buy these traditional life insurance plans?".. What about the persons who are working in unorganized sectors, who receive salary/income in cash.? As far as I know, Term Plan requires ITRs/Form 16s/Pay slips etc. So, what would be your suggestion on this? My brother-in-law has this situation. He earns 50-60K per month but paid in cash.
Dear Raghav,
If ones requirement is to be conservative and happy even if returns are around 4 to 6%, can pick a traditional insurance plan.
If one earns, 50 to 60 k pm, he has to file ITR and can get a Term plan based on that.
For low-income earners, there are Govt sponsored schemes and one can also buy term plan with lower cover..
Kindly read this article - How to empower your Domestic help (Domestic Workers) Financially?
It is a great article. I personally feel that traditional plans should be banished. Thank you for sharing this article
Hi Sreekanth,
Hope you everything is well with you. Srikanth Varma from Hyderabad again. :-)
I'm 30 year old with me and my spouse working in private sector and have a 3 year old daughter.
I've total four LIC polices for SA of 20 Lakhs and I'm paying approximately 85K as yearly premiums.
All are endowment policies (not even Jeevan Anand) and here are the details of the policies.
Policy1 - SA 5,00,000 - Tenure 30Years - Started on Dec 2005
Policy2 - SA 3,00,000 - Tenure 21 Years - Started on Sep 2007
Policy3 - SA 5,00,000 - Tenure 21 Years - Started on Feb 2008
Policy 4 - SA 7,00,000 - Tenure 21 Years - Started on May 2008.
I've taken these policies during starting of my career as per my father's suggestion. (His only concern then was to make me save some money than spending all the salary for expenses hence engaged me in LIC Policies).
After reading several blogs, I now feel that I should take a serious decision to scrap them. But I'm puzzled if I'm making the right choice or not. After reading your blog, best suggestion seems to be to make them paid-up policies. Is it the right choice in my case or should I just continue them for next 10 years? (For additional Insurance I've already taken Aegon Religare Term Insurance, that too after reading your blogs only. Thanks to you on that matter :-) )
Moreover, I generally use the loan on LIC policies as a contingency fund for all kinds emergencies. My second question is, if I convert all the policies to paid-up, would I still be able to avail Loan on these policies? Please shred some light on this.
Thank you,
Srikanth Varma
Dear Srikanth,
Suggest you to make these 4 policies as PAID-UP ones.
Yes, you can take Loan against Paid-up policies too, generally the loan value can be around 70 to 80% of surrender value in case of Paid-up ones.
Thank you for your prompt reply. Will make them PAID-UP ones.
Hi, Before i drop This Query I would like to thank you for the detailed description of the policies and their benefits. Really it helps a lot.
I Invested 1Lakh in HDFC Classic Assure Plus plan for 10years term (I am going to pay for 7Years only).
HDFC agent who offered me this plan said and showed some figures which shows around 11.5lakhs of profit at the closing of term (i.e., On the 1st of 11th year). But when i see the Policy details in online It shows Sum Assured is 3,80,000 (which is nearly less than what i have paid 7* 1,00,000 = 7lakhs) + min 3% reversal bonus on sum assured + Term Bonus. I am completely shocked with this details and No words to say.
I have below questions, if you can provide your feedback or suggestion it will be great help as like me two of my friends also invested in the same fund.
1. At max what is the min guarantee amount we are going to get after term year (10years) ? Is there any guarantee we get more than what we have paid ( I mean more than 7 lakhs).
2. Can we surrender this policy now itself (i paid only two installments yet). ? Based on your reply on first question i may get some clarity.
Once again thank you so much.
Dear Krishna,
It is an endowment plan. You will get more than what you have paid, on maturity. But the returns can be very nominal, after adjusting for inflation.
You can surrender the policy if you had paid the premium for three years.
Do you have a term insurance cover?
Kindly read: How to get rid off unwanted life insurance policy?
Dear Sir
I purchased one Jeevan Anand policy in Sept 2010 for a total sum insured 20 lacs over a tenure of 21 years. So till today, about six installments of about one lac rupees per year have been made.
Should at his juncture, it would be a wise decision to discontinue in between?
Dear Maninder,
Do you have any other existing life insurance policy?
If your requirement is life cover, you may buy a term plan and then discontinue this plan.
Read:
How to get rid off unwanted life insurance policy?
Best term insurance plans.
Hi Shreekanth
Truely eye opening article I.must say.
I request your suggestion on my issue. I am a 34 yeAr old working women, with annual income of 6 lakhs ,married and has one son.
I plan to rework on my finances by taking a term plan and start on sip. Before that I want to correct the mistakes in my earlier investments in.lic
1. I have 2 lic jeevan anand policies.
One bought in 2006 , 20 years term with premium of 7000pa , for which 10 years premium is paid till date.
2. Jeevan anand bought in 2011,20 years term with premium 22000 p a. 5 years premium paid.
Now I feel it's terrible investment and I should make it paid up or surrender them. After reading all these posts I feel paid up is better. Kindly suggest the right option and what would be my loss approximately.
I have around 6.5 lakhs fd in banks .Now planning for term plans . I have to choose btwn hdfc click to protect plus and icici prudence..which is better?
Kindly suggest.
Thank you.
Dear Keerthi,
1 - You may consider making 2011 policies as PAID-UP.
2 - I believe it is better to Surrender and re-invest this amount in better investment avenues.
Any specific reason for maintaining FDs?
Kindly go through below articles;
How to get rid off unwanted life insurance policies?
Why it is advisable to avoid FDs/RDs for longer period?
Best Term insurance plans.
Thank you very much Sreekanth. Will check it out with lic for surrender benefits if any. Regarding FD no specific reason. Just thought it may cm handy for son's higher education or in case of emergency. I Will chk the articles you have suggested. Any inputs abt SIP plz suggest. Thanks n regards,
Keerthi
Dear Keerthi,
Regarding MF SIPs, you may go through below articles;
How to select the right mutual fund scheme?
Best Equity funds.
MF portfolio overlap analysis tools.
What are Large/Mid/Small-cap funds?
Hi sir,
i am rajendran.R (age- 33 years ) working as a stationmaster at ariyalur, we want to get idea regarding with term insurance.
our questions are as follows:
1.we are planning to get a term insurance plan from hdfc life, it offers 4 types of term plans by name, lifecover , extra life, income option, income plus option.
which one is better among these?
is it beneficial to get any rider along with term insurance?
now we plan to get only basic life cover, later 3 to 4 years we want to add any rider means is it possible?
Dear Rajendran,
1 - Kindly read my review - HDFC click 2 Protect plus.
2 - Advisable to take basic cover and then buy a stand-alone Personal Accident insurance plan. Also, a health plan.
3 - Adding riders after the issuance of policy is generally not allowed.
Hi,
I really appreciate if you could advice on the following:
1. What would be the maturity value if I continue with my LIC Jeevan Saral and LIC New Jeevan Anand policies?
2. What would be the surrender value if I surrender my Jeevan Saral policy now? I know that for New Jeevan Anand I will not get any money as I have paid only for 2 years but If Iam loosing huge amount of 88,000 if I am surrendering
3. What would be the paid-up value if I stop further payments on Jeevan Saral & what if I pay another premium for New Jeevan Anand and make it as Paid Up
4. Finally What would be your advice – surrender or paid-up?
Also I would like to know that if am surrendering my both the policies then the income tax benefit that I have claimed earlier for the premiums I have paid will be taxable as income if the policy is terminated?
Dear Rizwan,
Kindly refer to my above comment.
Read: Tax benefits can be revoked..