When buying life insurance, people hardly think more than the sum assured, premium and tenure of the policy. Most of them choose life insurance policies according to word of mouth information from family, friends and colleagues. Awareness and education about insurance products is very low in India. In 2014, a survey was conducted by PHD Research Bureau on insurance awareness and knowledge in the country. The survey revealed that close to 50% of the population lacks information and awareness on insurance products. [1]

The PHD survey also came up with some important findings. Let’s have a closer look.

Too complicated – 30%

Difficult to understand – 24.68%

30% of the people surveyed thought that most insurance products were too complicated while 24.68% thought they had to put a lot of effort on understanding or it was difficult to understand. 34% of respondents admitted that they relied on friends, colleagues, family and word of mouth before buying insurance products. [1]

Information Sources For Buying Insurance Products
34% Friends, Family & Colleagues
3% Direct contact with bank or insurance company
20.22% Newspapers & Magazines
8.07% Television
7.30% Internet
19% Intermediary agents

Source: PHD Research Bureau [1] 

To increase your awareness about life insurance products, in this article lets focus on three popular life insurance products: Endowment Plans, Term Plans and ULIPs. More importantly, we will discuss the differences between these three insurance products and also provide answers to questions such as: What is a Unit Linked Insurance Plan (ULIP)? What are term insurance benefits? What is term plan with maturity benefit? How do endowment plans work? etc.

Endowment Plans:

Endowment plans are among the most popular life insurance products in India because it combines the twin benefits of investment and life cover similar to a unit linked insurance plan (ULIP). However, it differs from a ULIP in several ways When you invest in an endowment plan, you are getting life coverage as well as saving money for your retirement, children’s education and marriage, or a house. The policyholder’s family or nominee gets the sum assured amount on death of the policyholder. In case the policyholder survives the policy term, he gets the maturity amount plus any bonus accrued on the endowment plan.

The benefits of endowment plans include:

  • Financial protection of family against the policyholder’s sudden demise or permanent disability
  • Savings based on important life goals such as retirement, house purchase, children’s marriage and education, etc.
  • Tax exemption under section 80C and 10(10D)
  • Loan against policy during financial emergency

Term Life Insurance

A term life insurance policy is one of the simplest and most cost-effective life insurance products. It provides life coverage for a specified period during the policy term and if the policyholder dies, the sum assured is paid to the nominee in lump sum or as monthly pay-outs. Your term insurance benefits from maximum coverage at a minimum premium. An 18-year-old non-smoking male can avail a term life insurance plan with a life cover of 1 crore at just Rs.14 per day till the age of 75

Compared to a ULIP plan or endowment policy, a term insurance can provide your family more financial protection. However, it does not have the savings or wealth creation advantages of a ULIP or endowment policy.

Life insurance products are evolving and some insurance companies have come up with term plans with maturity benefit. Future Generali Term Plan with Return of Premium (TROP) is one such term life insurance policy that returns back up to 115% of the premiums you have paid if you survive the end of the policy term, which ranges from 10-15 years.

ULIPs

ULIPs give you the triple advantage of insurance, wealth creation and tax-saving investment. In ULIPs the money that you pay as premium is partly invested on funds and partly on risk cover. You can choose the funds to invest depending upon your risk appetite and investment horizon.

While endowment plans and term plans offer you guaranteed returns on the death of the insured or after maturity, returns on ULIPs are not guaranteed but can be higher because they are based on market performance of the fund. Also, with ULIPs, you have the flexibility of switching funds and tweaking your investment strategy with minimal hassle.

Below we will look at a few major differences between ULIPs, endowment plans and term insurance plans.

ENDOWMENT PLANS VS. TERM PLANS VS. ULIPs

ASPECT TERM INSURANCE ENDOWMENT PLAN ULIPS
PROTECTION LIFE COVERAGE LIFE + INVESTMENT LIFE + INVESTMENT
PREMIUM LESS HIGH HIGHER
MATURITY BENEFIT NO MATURITY BENEFIT UNLESS TROP DEATH BENEFIT AND SUM ASSURED + BONUS ON MATURITY UNITS REDEEMED AFTER PREVAILING RATE AFTER MATURITY
RISK NO RISK NO RISK HIGH RISK
RETURNS NA MEDIUM HIGH
TRANSPARENCY NONE NO OPTION TO TRACK CAN KEEP TRACK OF PORTFOLIO
FLEXIBILITY NO FLEXIBILITY EXCEPT ADD ONS NO FLEXIBILITY IN INVESTMENT CAN SWITCH FUNDS AND CHANGE INVESTMENT STRATEGY
TAX BENEFITS AVAILABLE U/S 80C AND 10D AVAILABLE U/S 80C AND 10D AVAILABLE U/S 80C AND 10D

ULIPs, endowment plans and term plans have their pros and cons not unlike any investment or insurance tool. It’s important to identify and opt for a life insurance product that gives you the maximum advantage based on your investment goals, horizon and risk appetite. Research and gather much information about these products before you invest and don’t forget to go through the policy terms and conditions.