Which smartphone to buy seems to be an everyday question of various Facebook groups. We are spoilt for choice in this day and age. This or that is a constant question.
When it comes to investments, we seem to have a lot of choices as well.
One question that often perplexes many insurance takers is whether they should diversify the insurance portfolio or have just one pure protection plan with a large life cover. Let’s see which one sounds like a better option.
Single insurance Vs multiple insurance
In Term Plans –
Premium cost: One argument in favour of a single term plan with large life cover is that it would be cheaper to have. For instance, Rahul, a 36 year old non-smoker, takes an e-term plan of Rs.1 crore for 30 years at an annual premium of Rs.15374.
If he takes a cover of 50 lakhs, the premium amount is Rs.8698. This means that he will have to pay Rs.17386 altogether if going in for two different policies to get a cover of 1 crore.
Cover against claim rejection: It is less likely that the insurance company would reject your claim if you have given all the information correctly at the time of applying.
Having another insurance scheme from a different insurer may come handy just in case your claim does get rejected. Diversifying your insurance portfolio makes sense if you are worried about this possibility.
Insurance with different maturities: Many people decide the size of their life insurance cover in line with their liabilities. If so, is it wise then to buy multiple insurance policies with different maturities?
Suppose Rahul had an outstanding amount of Rs 30 lakh in his home loan and the balance tenure of his loan is 15 years. He thinks that he need a higher cover only till the loan lasts, thereby, saving some premium that way. While deciding the size of the cover, he opted for two term plans with different maturities.
He bought a Rs 50 lakh cover for 15 years and another Rs 50 lakh cover for 30 years. Here, for the first 15 years, he could get a cover of 1 crore and for the balance 15 years, a cover of 50 lakhs only. But is he saving on premium in this way? Let us see:
For a single term plan of 1 crore for 30 years, he will be paying Rs. 15374
For a term plan of 50 lakhs for 30 years, he will be paying Rs.8698
For a term plan of Rs 50 lakh for 15 years, the premium is 6408
So in fact, Rahul is not saving on premium by going in for the second option. This is because, in the second case, he will be paying a premium of Rs.15096, but with a lesser cover for the last 15 years.
In Investment-Linked Insurances:
Diversifying ULIP plans: While traditional endowment policies may not be a good investment option, as they neither offer good cover nor good returns, Unit-Linked Insurance Plans (ULIPs) could be an alternative for term insurance. ULIPs can offer a cover 25-30 times the annual premium.
ULIP plans invest your premium in different funds- equities, or debt or a mix of both, so it will be good to invest different plans to get the benefit of diversification of funds.
But remember, a part of the premium in ULIP would go towards mortality, allocation, policy administration and fund management charges. So, taking different policies of smaller amount may mean more charges going out from your premium paid. But as the returns of ULIPs are based on market performance, a diversified portfolio may give you higher returns than a single policy.
Having multiple insurance policies in the portfolio has its advantages, even if it may cost slightly higher than a single policy with a large life cover. The cost can be minimised by choosing the right kind of insurance policies and the right tenure.
Also, more than one investment-linked insurance policies or plans can offer different tax deduction benefits.
Sometimes, you know exactly what you need when someone asks you questions like, Pepsi or Coke, Asterix or Tintin, Romcoms or Horror. Now you know exactly what works for you with investments as well.
Disclaimer: The premium rates mentioned here are based on the e-term plan offered by HDFC Life.http://ops.hdfclife.com/ops/online-term-insurance-plans/buy-click-2-protect-plus.do?method=proceed¶m=143737434357619915333. This may vary with other companies.
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