Life insurance finds a place in most of your financial portfolios. While some buy life insurance as a means of financial protection, others look at the investment angle of it. There are also individuals who buy life insurance cover only to save their tax liability. Life insurance can thus be categorised into various plans catering to a unique objective.

Term Plans provide financial security while ULIPs provide investment benefits. On the other hand, child plans help in creating a secure financial future of your child while pension plans build up a retirement corpus. With the different plans available, one gets confused as to which plan should be bought first.

Life insurance plans, as stated earlier, fulfill different objectives. The choice of one’s first life insurance plan depends on that person’s current life stage. When you are young you can buy a ULIP for investment purpose and a retirement plan makes more sense if you’re middle-aged. But there is one plan which is relevant to all life stages, and it is called a term plan.

A term insurance plan helps you avail a high sum assured cover at a low premium. With a term plan, one can get an optimum level of coverage. The plan pays a lump sum benefit in case of a person’s premature death. Thus, it ensures the family is taken care of financially even in one’s absence. Since a term plan provides unparalleled financial security, it can be bought at any age (though the younger you are, the better) and it should be your first life insurance plan.

Does it mean that ULIPs or traditional endowment plans are not useful?

A traditional endowment or money back plan and a ULIP are both beneficial life insurance plans. They help in wealth creation and also provide life insurance coverage. But, in terms of financial security, a term plan is the best and should be your first choice of a life insurance plan.

Here is a comparative analysis of all three plans so that you can see why a term plan takes precedence:

Points of discussion	Term plan	Traditional endowment and money back plans	ULIPs
Features	Allows a high coverage at low premiums. Thus, the plan provides high life insurance protection.	Creates a guaranteed saving corpus through regular premium payments. The plan also provides insurance cover.	Helps in capital appreciation by providing returns linked to the capital market. Life insurance coverage is also provided by the plan.
Need fulfillment	Income replacement	Wealth creation	Wealth creation and maximisation
Advantages	–          Easily affordable –          Ensures the optimal coverage amount –          Replaces lost income in case of premature death –          Unparalleled financial security for bereaved family	–          Creates forced savings –          Helps in creating a corpus on plan maturity –          Also provides life insurance coverage by paying a death benefit	–          Provides market-linked returns –          Returns are thus inflation adjusted –          Helps in capital appreciation –          Also provides insurance coverage
Disadvantages	–          Usually, there is no maturity benefit	–          The corpus created is not inflation-adjusted and so it’s real value is low –          The death benefit provided might not be sufficient for the family.	–          Though returns are high, the death benefit is not. The plan, thus, does not provide sufficient insurance coverage. –          A higher insurance cover involves a high mortality charge which reduces the returns generated.

 

Though life insurance plans, traditional plans, and ULIPs are also advantageous, a term plan could outweigh them if the insurance seeker has dependent family members. The need for income replacement is done best by a term plan which is priority. Other needs like wealth creation and appreciation can be achieved through ULIPs and other investment-linked plans. However, be sure to consider other investment and tax-saving alternatives such as Public Provident Fund (PPF) and Mutual Funds too.

(The writer is CEO, BankBazaar.com)