Understand traditional and non-traditional Life Insurance investment plans

Traditional insurance policies are of two types — participating and non-participating.

Participating policies:

Before starting investment, a smart investor needs to understand the pros and cons of the plan therefore traditional & Non-traditional Life Insurance Plans come with their pros and cons. Traditional policies are a low-risk investment product. These policies mostly invested in bonds. In the Traditional plan, customers get a guarantee (Partial or complete) on the cash flow, they receive over the time-period of the policy.

A participating policy enables you as a policy-holder to share the profits of the insurance company. These profits are shared in the form of bonuses or dividends because the bonus that is given in this policy is not guaranteed. It is based on the performance of the insurance company.  The most important benefit of participating policies is that it not only provides protection but also provides returns in the form of a bonus.

ULIPs or Unit Linked Insurance Plans that pay bonuses or dividends can be classified as participating policies.

Non-Participating Policies:

In non-participating policies, the profits are not shared and no dividends are paid to the policyholders. This type of policy also known as a without-profit or non-par policy. In the case of a non-participating policy, there is no bonus or dividend paid to the policyholder. There are no payments on non-participating policies because the profits not shared. The premiums are a little lesser than participating policies.

A term insurance or permanent life insurance policy is a non-participating policy.

These traditional insurance products suited to those who have a very low-risk appetite. The return from a traditional insurance product ranges between 3-5 percent. For people who are afraid of their investments being a subject of market gyrations, investing in traditional products is more suited. besides that, traditional insurance doesn’t offer much liquidity Hense, it is suitable for people with a tendency to spend a lot of money. The return from the traditional insurance policy is low. However, at the time of maturity, a policyholder gets fund value which is tax-free, plus bonuses.

Financially-inclined investors looking for triple benefits of insurance, the tax benefit, and higher returns should opt for other products. They can invest in a combination of Term Plan and Public Provident Fund. PPF offers a rate of 7.6 percent currently, which is tax-free. An investor with a little more risk appetite can invest in ELSS and term plan. ELSS schemes are market-link and have given an average return of 18.15 percent over the past five years.

Non-Traditional Insurance Policies:

First of all, Non-traditional products like unit-linked insurance plans are there in the market; which serves as both an investment and insurance. ULIPs are investment products, where a part of the premium invested in different types of funds (equity, debt, money market, hybrid etc.). ULIP products offer higher returns in the range of 12-15% for equity investments & are a safer bet with 8-9% returns for debt investments. The cost of Ulips is as low as that of a combination of a direct mutual fund and a term plan. Ulips are a viable option, if you don’t mind the five-year lock-in all ULIPs are subject to.

Nowadays, ULIPs are available on the market with zero premium allocation charge & zero policy admin charge. So the return of mortality rate also returns at the end of the policy term. As a result, it makes them highly competitive with mutual funds both in terms of returns and charges.

Some features of both the plans illustrated below: