ULIP or Equity MF- Which one better?

ULIP or Equity MF – Which one better?

I have often seen very confused investor for which one is good for investment either ULIP or Equity MF. Both are long term investment product. Investors often lure with the ULIP for very catching word insurance. Whereas equity mutual fund do not offer any insurance but great return as the efficient wealth creator in long term.

Although, Unit-linked insurance plans (ULIP) offers many types of funds from equity to debt segment. If you compare its return over the five year period, it has performed very bad when we compare it with equity fund return.

Recently a very informative financial magazine has done a study about the return of ULIP and equity mutual fund schemes. The Top 10 ULIP funds has given an average anuualised return of 16.61% while mutual fund schemes has delivered an average return of 22.20%. If we compare top 25 ULIP funds and top 25 equity mutual funds, ULIP delivered an average return of 15.28% and MF schemes return has been 20.71% in the same period.

ULIPs published their NAV before adjusting fund management cost and other cost while equity mutual funds published NAV after adjusting all cost. It is the reason investors are not getting right comparison between ULIP and equity MF funds. Returns from ULIP would be more worst after deducting charges like premium allocation charge, mortality charge and other charges. These charges are different for ULIPs managed by various financial entities. Only fund management charge is adjusted in unit price of ULIPs funds. MF schemes unit prices are calculated after deducting all expenses. This makes equity mutual fund return more superior than ULIP funds.

The fund management charge, of around 1.35% may attract investor towards ULIP as it appears lower than expense ratio of equity mutual funds. But when we consider other costs of ULIP- in most cases- it goes up to above 3% in the initial years of investing in ULIP. In an analysis of 237 ULIP funds, more than 50% of ULIP funds underperformed the Sensex over a period of 5 year ended in Feb 2015.

IRDA has put some cap on various charges after 2010. But still the costs of ULIP are much higher than equity MF. If you are looking for good long term investment option with low cost, equity mutual funds are still good choice.

If you have doubt about investment product and want more information regarding investment or you need investment services, feel free to ask us. We also conduct the seminar on investment and financial planning. If you are interested for conducting seminar in your city, just drop the mail.

Warm regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

Equity Investment: Suitability & Available   options

In the last equity related article we have discussed about advantages and disadvantages. Today, we will discuss for whom is equity investment is suitable and how can we invest in equity. First, lets talk about some point about those investors who qualify for equity investment.

• Equity investment is for those investors who have risk taking capacity. In the near term, the valuation of their investment may be go down significantly. It may not be suited for those investors who want to safety of their capital any time. Before any equity investment investor should gauge their risk appetite.

• It is suitable for those investors who want earn higher return on the investments after adjusting inflation. As per available data, equity has beaten each asset class in the long run. If you want to beat inflation in the long run, equity investment for you would prove the best bet.

• Equity investments need patience and discipline. You must have patience to achieve your long term goal. You can easily achieve your long term goal like retirement plan or any goal more than ten year by investing in equity every month on regular basis. Be investing every month you get benefit of rupee cost averaging also.

• As per current taxation, the long term capital gain in nil on equity investment and dividend is also tax free. It is good option for those who want prudent tax planning.

How can we invest in equity?

After discussing suitability of equity now we are going to discuss how we can invest in equity. There are 2 ways to invest in equity.

Direct Investment

For direct investment, you need to open a demat account with any registered broker and need a bank account for transaction. You can purchase a listed company’s share by calling your broker. It is so easy. Many companies come with IPO (Initial Public Offer) to issue share directly to the retail investors. Any investor can participate in the IPO.

It is suitable for those investors who have vast knowledge of the companies, economy and business cycle. It required a lot of time, knowledge and skill.

Indirect Investment

For those investors who have not much time to study about companies and financial market, there are indirect investment options available. Mutual fund is the best option available to reap the benefit of equity investment. Any investor can invest a small amount like Rs 500 every month on fix date and can make the good corpus in the long run. The mutual fund investment provide the advantage of professional management, qualified research team, transparency in investment for any type of investors with even small sum of investment.

There are other indirect equity investment options also available like PMS, ULIP etc. As per my view, mutual fund is the best and low cost option available for everyone.

If you want more information regarding equity investment or you have any other query related investment feel free to ask us.

Warm regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

www.artofinvest.com

www.arvindtrivedicfp.blogspot.in

Beware of your bank representative

Beware of your bank representatives..!!!

It is seen, we Indian have very much trust with our banks. Fixed deposit in bank gives us peace of mind and a sense of greater safety. We give much importance to safety of our capital than real return. As we enter in bank branch, we totally surrender ourselves to the bank representative. A bank representative with skilled communication push to the other financial products like insurance, ULIP, endowment, money back policy and many more other products for complete their monthly target.  

I tell you here, a true event which happened today inside the bank branch which is very famous brand in banking industry. Although it is very common in our country but I still want to share it with you. I was in Axis Bank branch in the morning to make a demand draft. I have submitted the request for the same and waiting for collecting my DD. The process to make DD takes 10 - 15 minutes usually. A 25-26 year approximate age girl in the banking counter was explaining a fix deposit plan to a client. She was promising 24% fix return from a mutual fund scheme if he deposit money for 3 years and repeated it thrice with very confidant and smiling face. The surprising thing was that customer had got convinced from that girl who was representing the bank for invest in that scheme within 30 seconds. I was shocked that the customer had not asked any question about the risk associated with that scheme. When customer asked about the tax benefit in that scheme, she had smiled with moving her head and said “No, Mutual Funds me koi tax benefit nahi milta hai” (There are no tax benefit in mutual fund at all).

I was very shocked and surprised for that the witty communication by that bank representative. It was a clear example of mis-selling by that bank employee. In realty, a bank customer was cheated by that bank employee. A thousands and millions bank customer was cheated by such representatives of the banks. I am not against any bank or and bank representative but yea I am against their faulty communication with the bank customer. Anyway, I am giving you below some points which every investor should always keep in mind when they make an investment decision.

• In mutual fund, there is no assured and fixed return. The return is totally depends on many factors like market movement, interest rate, inflation rate GDP growth and many more.

• The promise of 24% is unrealistic return in such current economic condition when govt bond offer around 8%. I am not saying it is impossible but you cannot commit it to anyone.

• There are tax benefit exist in mutual funds scheme which I have written in my past articles. When you promise such a high return, you should also talk about risk associated with such schemes whether mutual fund or any other asset class.

• As an investor, it is also your responsibility before making any investment decision understand the risk and return properly.

• Do not believe on any agents, bank representative do your own research from many other sources. The agents are not your friends. They also have some sales target. So next time, beware from such agents and representatives.

 For more detail and any other query related investment, you can contact me through my email.

Warm regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

www.artofinvest.com

www.arvindtrivedicfp.blogspot.in

Are your   investment agent cheating you?

Yesterday, I was my in area’s neighbor shop for my hair cut. He had narrated one incident with happened with his relative who is not educated and never went school. His relative’s main profession is agriculture. One agent had come to him before 5 year’s back and promised him 2 times return whatever amount he deposit. He had trusted him and deposited Rs 45,000 with the hope that after 5 year he would get Rs 90,000. After completing 5 years when he had contacted his agent, the agent was not available. After contacting to the concern office when he had knew the value of his investment. It was shocking experience for him. Can you guess the value of his Rs 45,000 invested after 5 years? The value was only Rs 17000 !!! only. Such huge wealth destruction he had never imagined. His agent has cheated him by making false promise and hot informed about the investment product. 

Till now many of you may guessed, yes it was ULIP product. A product designed by mixing insurance and investment called ULIP.

I am sure that you also here such type of cheating incidents regarding investments. I always write in my blog and during the meeting with investors that never mix your investment with insurance need in one product. Avoid such products.

I think insurance product sold by more in emotional sense and less in real need sense. The agent finish conversation in very hurry and their large focus on sign the document quick. They only tell you what you want to hear like “promise” and “guarantee” type words. They often do not talk about product in detail never tell you about the risk of that financial product. My friends keep in one thing in your mind that there is not a single financial investment product designed in the world without risk. Every investment product comes with a type of risk. Now the question how to avoid yourself being mis-sold. I suggest you some point here.

• ·         Do read carefully before sign any form or documents.
• 
  
• ·         Understand about the product which offered by your agent.
• 
  
• ·         Contact the company’s call centre and cross check your agent.
• 
  
• ·         Never give and bank cheque or sign the form in first meeting.
• 
  
• ·         Collect all detail about agent like his office address, contact, employee ID, job tenure, some little background about him and cross check by calling his office
• 
  
• ·         Use internet to know more about the offered product
• 
  
• ·         Focus on real return after cut taxes and expenses.

There are many more points worth discuss which we will discuss again sometime.

For more detail and any other query related investment, you can contact me through my email.

Warm regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

www.artofinvest.com

www.arvindtrivedicfp.blogspot.in

Are  you considering guaranteed plan...? Think again!!!

After ULIP out of season, equity market’s return flat the insurer and mutual fund using “Guranteed” word to attract business. I am sure that most of you very often interested with these schemes for shake of your protecting your capital. After sometime you realize that your choice was wrong. I always recommend to all investors that please read whole offer document, search on sites or take advice from any good financial planner before any investment. No matter what is the investment amount.  After all it is your hard earned money so be prudent at the time of investment.

Guarantee is a very powerful world in any sales drive. Insurance companies offer guaranteed payout and insurance cover both to push the sales and get the benefit of investor’s mindset as these products are easily marketable with less effort. Before caught in the sales pitch you should enquire about the return of investment.

It has been very clear now after review of many these types of guaranteed insurance plan often fail to deliver the return even equal to bank fix deposit in the long run. I am not mentioning here the particular name of these types of plan as I don’t want to create any misconception or controversy but you will also believe after the decoding these plans carefully.

Guaranteed income plans are non- participating traditional plan and never disclose the investment costs and return. For example one plan says in the fine print that “ 8 % of the sum assured as payback guaranteed”. Most of the time investor think that he will get return of 8 % on the investment whereas the fine print means that there is guaranteed 8% payout of the sum assured. After many such plan’s analysis the actual net rate of return is 4%.

4% return is not great return in the 10-15 years. If you still happy with these types of return choice is yours.

The cost of guarantee is so huge and opaque that it is very difficult to arrive a net return on the investment. You are not getting only lower return you are also eroding your capital against inflation. According to me, you should concentrate on generating value from investment in the long run.

If you are conservative investor, Public Provident Fund (PPF) is good option for high tax bracket. Lower tax bracket investor may go with bank fix deposit also.

If you have some risk taking capacity you can make good capital appreciation with tax saving. ELSS mutual fund is the best option for long term investment as it offer capital appreciation with tax saving.

For more detail and any other query related investment, you can contact me through my email

Warm regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

Traditional Plans V/S ULIP Pension Plans

Traditional Plans V/S ULIP Pension Plans

I have read very useful and interesting article on insurance in Business Standard daily and I want to share it with all of my reader. It is very useful for all of you.

Pension plans of insurance companies should carry a warning---when it comes to retirement planning, these are more expensive and don't offer the tax benefit of instruments such as Public Provident Fund (PPF) and National Pension System (NPS). PPF is exempt from tax at the investment, accrual of interest and withdrawal stages, while NPS is cheaper (the commission paid to fund managers is just 0.25 per cent).

In the case of pension plans from insurance companies, the annuity paid is taxed at the hands of the policyholder. And, the commissions and charges are higher than NPS. But if you have invested in PPF and NPS and still want to save for retirement, you could consider pension plans. These help you accumulate savings and build a retirement corpus. A third of this corpus is commuted, meaning it is paid to you on maturity. This amount is tax-free. The rest is used to give you regular income through an annuity plan; this income is taxed.

By providing a tool to accumulate and invest your savings, these plans give you a lump sum on retirement, then used to get regular income through an annuity plan. Given the high cost of living and rising inflation, employer pensions alone aren't sufficient.

Within pension plans, there are unit-linked and traditional ones. The basic difference between the two is the kind of instruments these invest in. So, how does one decide which is best for him/her?

Traditional plans are more oriented towards investment in debt funds, as these have a certain guaranteed sum assured for policyholders at the end of the tenure. "A major part of their investment, about 60 per cent, is in government securities. That is why it may not be possible for a traditional plan to give returns that beat inflation," says Prakash Praharaj, founder and chief financial planner of Max Secure Financial Planners.

In the case of a unit-linked or market-linked pension plan, a policyholder can choose the investment limit he/she wants for equity investment. But market risks are involved, as the investment is linked to equity markets. "If you are starting your retirement planning early, you could go for Ulip (unit-linked insurance plan) pension plans, as these would give better returns. Traditional plans wouldn't give very high returns because of the cap on investments prescribed by the regulator," Praharaj says.

According to Anuj Bhagia, chief marketing officer, Policybazaar.com, Ulip pension plans are preferred. "They allow the policyholder a choice of funds, along with investment in equities, which helps in faster accumulation of funds with growing markets," he says.

Ulips also give the policyholder an option to switch between the investments (debt and equity) three to four times a year. But this would help only if a policyholder understands the market risks and is able to switch at the right time.

According to Insurance Regulatory and Development Authority guidelines, both traditional and Ulip pension plans have to provide minimum guaranteed returns, as these are aimed at building retirement corpuses. Traditional plans guarantee a minimum sum assured, along with bonuses, if any, while Ulips provide a minimum guarantee of about 4.5 per cent.

"Ulip plans go through the vagaries of the stock market. So, the returns may not be as high as expected, while traditional plans, with their debt outlook, are a more trusted partner, though these have slow wealth accumulation. Therefore, as an investor, I need to know what product I would want to purchase, according to my appetite," says Bhagia.

As bonus is discretionary, not mandatory, customers choosing a traditional plan should look at the past record of companies in paying bonuses, says Sanjay Tiwari, vice-president (strategy and product), HDFC Life. The company offers both Ulips and traditional pension plans; there are sets of customers for both.

Another advantage of Ulip plans is the option to top-up or increase your investment. This could help inflate the investible amount, which, for a pension plan, is beneficial to build the overall corpus through the long term, Tiwari adds. For a traditional plan, there is no such option.

Amitabh Tapadar, chief marketing officer, Tata AIA Life Insurance, says while equity gives better returns through the long term, according to the new regulations, insurers have to give a non-zero guarantee, even on Ulip pension plans.

Therefore, there are chances companies offering Ulip pension plans would also invest substantially in debt market, as the equity exposure is limited. Hence, their returns might be less than in the case of pure equity investments.

In terms of costs, Ulip plans score over traditional ones, owing to transparency. Traditional plans are cost-heavy and opaque, unlike Ulip plans, for which all charges are confirmed to the consumer upfront. But a few insurers charge a guarantee fee for Ulip plans.

One should check these before purchasing a plan, Bhagia says. Customers should also look at the history of the insurance company, in providing annuity service, as it is now mandatory to buy the annuity from the same company one buys the pension plan from.

For more detail about any other query related investment, you can contact me through my email.

Warm regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

Common mistake during tax planning

Common Mistakes during Tax Planning

All of us want to save tax more and more or in fact no one want to pay tax happily. Most of us don’t plan in the beginning of financial year. We awake for it when our office accountant remind us or our CA. The main reason behind wrong tax planning is to wait last moment of financial year (Feb-March) closing. In the hurry of tax planning in last moment we often ignore the essential element of financial planning like our financial goal, risk appetite, income and investment product.

If you have ever felt that during Jan to March we will get so many telephone calls from insurance company for ULIP (Unit Linked insurance Plan). ULIPs are insurance cum investment product and have many charges which are not mostly disclosed by an agent. In fact you should not mix your insurance with investment, one of the golden rules of financial planning. In these products, you don’t get adequate risk cover so your insurance planning spoil and you get raw deal in the hurry of tax saving.

We often do not optimize all tax saving options. Many of us only stuck with Section 80(C). There are also so many other options exist which you should explore with the tax expert. There are many other relaxation of tax like medical treatment of dependant handicapped, loan for higher study, suffering from specified diseases and many more.

If your age, income and risk appetite allow you to some degree risk you must invest in ELSS mutual fund. These funds come with 3 year lock in period and worth for invest. It is the good option for tax saving. If we keep in mind the mentioned things in this article, we can make optimal financial planning.

For more detail about any other query related investment, you can contact me through my email.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

One more Single Premium Insurance cum Investment Plan

One more Insurance cum Investment Plan

I have came across one article in business standard which I want share with all of you.

Life Insurance Corporation's (LIC's) 'Jeevan Sugam' is a single-premium endowment product. Since the product gives death benefit (sum assured) that is equal to 10 times the premium paid, it will qualify for tax exemptions under Sections 80C and 10(10D) at entry and exit.

Along with LIC, Star Union Dai-Ichi has a similar product to offer, which is giving a higher guarantee and a better rate of interest than LIC on Rs 1 lakh single premium paid by a policyholder. Both are single premium endowment products. The insurers have launched this products under the endowment umbrella to give guaranteed returns to customers. Additionally, there are enough single premium products available in the market which fall under the ULIP category.

The products are available to people between the age group of eight and 45 years. According to experts, individuals will have to undergo a medical test before buying this product.

Both the products are close-ended and will be available for purchase only till the end of this month. While both the products are giving a death benefit equal to 10 times the premium paid, their maturity benefits will differ. Ten years is the policy tenure.

According to the data available, if a person buys Star Union's 'Dhan Suraksha Platinum II', he or she will get a maturity benefit of Rs 1.81 lakh after 10 years (policy tenure) against Rs 1.77 lakh in LIC's 'Jeevan Sugam'. Reason: The difference in their returns is due to the different mortality tables used by both insurers. Experts say since LIC is deeply rooted into rural areas where risk to life is higher, there are chances their premium rates are higher due to that.

Pankaj Maalde, head-financial planning at Apnapaisa.com says, in the long run, Star's product will return better than LIC's because after 10 years Star Union's product will give an IRR (internal rate of return) of 5.8 per cent, compared to 5.6% returned by LIC.

Hence, one shouldn't buy these products for investment sake because their returns from the guaranteed portion are not attractive. If one is looking at good returns, they can consider investing in a Public Provident Fund (PPF) and bank fixed deposits which guarantee better returns.

While insurance is not for investment, it's still better to weigh your options in case you plan on buying one. Hence, it's better to compare insurance products, their premiums and benefits offered before buying them. Financial planners say it's an investment product and people left with no other tax-saving avenue only should make use of such products. LIC and Star Union are offering an additional benefit of 4.5 and two per cent if your maturity sum assured exceeds Rs 5 lakh. In other words, Star's benefits here is less compared to LIC.

Star Union has clearly mentioned in the product details that the product will give a tax break on the plan benefits received, under Section 10 (10D). Whereas, LIC has not mentioned this on their website.

While R R Dash, zonal manager, LIC confirms the maturity amount from this product is tax-free under Section 10(10D), we have still refrained from mentioning it, in case tax laws were to be changed anytime this year.

In the case of Star Union, the maximum amount of loan that can be availed is 75 per cent as against 60 per cent in the case of LIC. That quantum will be available as the surrender value at the time of taking the loan.

If the policy is surrendered on or before the second year is completed, the insurers will return 90 per cent of the single premium paid. Whereas, in case the LIC policy is surrendered in the first year itself, then the company is returning 70 per cent, compared to 85 per cent in case of Star Union.

While single premium products are expensive compared to pure protection plans, it makes sense not to mix insurance products with investment products. While one has to make regular annual payments in protection plans, it makes sense, as the death benefit offered by life insurers is much more than such investment-based products. If one is looking at such products purely for tax-saving purpose, then he or she can also consider tax-free bonds giving returns in the range of 7 and 7.5 per cent. Additionally, people ready to take some equity exposure can invest in an equity-linked saving scheme.

For more detail about any other query related investment, you can contact me through my email.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

New Guidelines from IRDA for index link and health insurance

New guidelines from IRDA for life insurance and general insurance product

In last few days, The Insurance Regulatory and Development Authority (IRDA) has issued some important guideline to life insurer and non life insurer. According to new guidelines for traditional product, non-linked variable insurance products (index-linked products) to be treated at par with unit-linked products (Ulips). The insurers have been given time till June 30 2013 and September 30, 2013 to re-file their group and individual products respectively.

Guideline for Commissions:

The cap for first year commissions has been put at 15% for the first year for a 5 year term, 30% for 10 years and 35% for 12 years or more. The insurer in industry less than 10 year this cap would be 40%. In the case of polices are procured by direct marketing, there would be no commission allowed. According to new guideline the shareholders will get at 10% of the surplus and the policyholders would be entitled to 90% share of the surplus.

Guideline for surrender value:

The minimum guaranteed surrender value would be 30% of the total premiums paid less any survival benefits paid, if policy is surrendered in the second and third year. If surrendered in the fourth year, it would be 70% of the total premiums paid less any survival benefits already paid. If surrendered during the fifth to the seventh policy year, it would be 90% of total premiums paid, less any survival benefits already paid.

Guideline for death benefit:

According to new guidelines for death benefit Irda said the minimum death benefit at highest of 125% of the single premium or minimum guaranteed sum assured on maturity or any absolute amount to be paid on death, for single premium products. For other products, it will be highest of 10 times the annualised premium or 105% of all premiums paid on date on death, or minimum guaranteed sum assured on maturity or any absolute amount to be paid on death.

Norms for pension product:

For pension products, it said that upon surrender of pension products, one-third can be commuted and balance can be received only as annuity upon superannuation with the same insurer. The same option is available upon vesting with additional option of extension of deferment period if aged less than 55 on vesting.

New norms for health insurance:

IRDA has allowed to general insurance companies to launch 3 year health insurance policies. Now insurer cannot refuse the renewal without any sufficient reason. Longer period health insurance is good for customer as till 3 year renewal done automatic and also get the cheaper premium than current they are paying.

If you have any other query related investment and financial planning feel free to ask.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

Welcome step of IRDA

As we are aware of mis-selling of insurance product like ULIP. These products are often sold for 3-5 years horizon by false promise of cunning agent. Now the insurance regulator –  Insurance Regulatory and Development Authority (IRDA) whose role has been protecting policyholders' interests along with its role of developing the insurance industry. But at a time when policyholders are being lured to buy insurance products or marketing gimmicks undertaken by the insurer; the insurance regulator - IRDA has expressed its discomfiture and brought out a number of changes to protect the interests' of the policyholders.

In the last few months the IRDA had  expressed many times its uneasiness with the ‘highest NAV guaranteed products' at several forums. The regulator's argument was that such products lead to systemic risks with the way funds were managed, and also pose a risk of a heavy sell-off in equities when stock markets fall. Thus, in order to protect policyholders' interest, IRDA has asked life insurers to stop selling highest net asset value (NAV) guaranteed product.

Highest NAV-guaranteed products are those that promise to pay the highest value the fund achieves during a certain period, like five or seven years. However, to maintain that NAV consistently, insurers have to take risks by investing in stocks aggressively, which could lead to undue risks, as per the IRDA. It is notable that, these products had become the largest selling

Some of the other actions undertaken by IRDA to uphold policyholders' interests' are:

·         Single premium policies to be issued only under special categories

·         A minimum death benefit of at least 10 times of the annualised premiums in case of traditional products

·         New guidelines for traditional insurance products

·         Approval of new insurance products to be restricted to those following the framework suggested for new product design

From the above steps undertaken by the IRDA, policyholders are set to benefit in a number of ways. With the ‘highest NAV guaranteed products' being squashed by the IRDA, there would be less mis-selling under the name of highest NAV guarantee. Increasing the minimum life cover will help policyholders as in case of any unforeseen eventuality the policyholder's family receives a sizable amount. We believe that though the IRDA is taking stern actions in order to safeguard the policyholders' interest, it should have adopted a proper clearance process, thereby discarding at the very first stage itself, by providing sufficient explanation in the public domain, thus making policyholders' aware as well. It would be wise for the IRDA to be proactive rather than reacting with policy changes in its role of protecting the interests' of the policyholders who have already been victim by mis-selling

Dear readers if you have some query regarding any financial products, feel free to ask.

Warm Regards,

Arvind Trivedi

Certified Financial Planner

Traditional Life Insurance Plan

We often read and hear term ‘traditional life insurance plan’. I don’t know how many of us know about this term. But my personal survey among my friends shows they don’t know exact meaning of this widely used term.

There are main two type of life insurance available in the market, one is ULIP (Unit Linked Life Insurance Plan) and the other is ‘Traditional Life Insurance plan’. ULIP is directly linked with stock market and it is more transparent than traditional life plan. But due to high charges and much volatility in stock market now ULIP has become less attractive. However too much miss selling of ULIP products is equally responsible for this. Now for safety of capital and and guaranteed return insurance customers now looking for traditional policy.

Traditional plan gives a low return than ULIP but due to safety of capital people tend towards these plans. These products  are recession proof and not linked with the ups and downs of the stock market. It is suitable for those who seek insurance rather than investment. Depending on your financial objective, loan liability and family responsibility you can choose a suitable traditional plan. Keep in mind there are many other investment avenue which can also fulfil of your financial objective in much better way than these traditional plan. We can divide traditional plan into two types:

Term Insurance Plan or Pure Insurance Plan:

It is pure protection plan. This type of provides only death cover- that is, the insurer pays the sum insured to the nominee on account of the policy holder’s death. Some policy offer the return of premium (ROP) where if you survive the entire policy tenure, the insurer return the part of the premium or entire premium according to the terms of the policy. Each earning person who have dependant must purchase this. Now a days online term plan is available with very dirt cheap rate. It should be part of in everyone’s portfolio.

Endowment Plan:

An endowment plan serves as saving plan with protection. The insurer pays the sum insured plus declared bonus during the policy tenure if the person insured survives the entire policy term and if the insured person die during the policy term then the nominee get sum insured and bonus if any. The insurance premium is too much high compare with term insurance plan premium.

 Money Back Policy:

This plan is very similar as endowment plan. The only difference is the insured get some survival benefits at regular interval during the policy term. Some policies participate in the company’s profit by means of bonus. There are main 3 type of bonus company offered. One is reversionary bonus, it is direct added to the sum assured. It is calculated by simple or compounded method depend on company’s term and condition. Two- terminal bonus, it is offered to the customer at the time of maturity of the plan. Three, cash bonus. It is the bonus decleared by a company and comes in the form of cash.

Traditional plans can also act as collateral in times of emergency. The company offer loan up to 75-90% of the surrender value of your policy to fulfil your emergency requirement.

Dear readers if you have some query about any financial product please feel free to ask. You are most welcome for your feedback and questions.

Regards,

Arvind Trivedi

Certified Financial Planner