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Traditional Insurance Plans

Traditional Insurance Plans

One way to prepare for unexpected life events is to buy a life insurance plan. An insurance plan ensures your family has financial support in case an unfortunate event happens. Many people wait for the right time to buy a life insurance plan. You should know the right time to buy is NOW.

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What is Traditional Insurance Plans?

What is Traditional Insurance Plans?

Traditional insurance plans offer you life cover along with guaranteed returns. On the other hand, non-traditional insurance plans like Unit-Linked Insurance Plans (ULIPs) are more of an investment product and less of an insurance product. The returns here are usually higher but not guaranteed.

Here are the differences between the two types of plans

Feature Traditional Plan Non-Traditional Plan
Investment Assets Although you know how much money is used for which purpose you don’t have information on the asset allocation You have an option to choose the funds in which you want to invest depending on your risk appetite
Portfolio Tracking Since the returns are guaranteed and the premium is fixed, traditional plans do not have a portfolio tracking feature You can track your investment portfolio on a day to day basis
Withdrawal Withdrawal is not allowed. You can surrender your policy but there will be charges Partial withdrawals are available after the lock-in period. Alternatively, you can also surrender the policy
Switching Since you have no control over asset allocation, switching option is not applicable You have the option to switch funds as and when your life situation and needs change. Most plans offer you a range of options like equity, debt, bonds, balanced funds, etc
Maturity Amount The amount is fixed, you receive an additional bonus which is not fixed The returns vary but in most cases are higher
Risk These are a low-risk investment option These are medium to high-risk investment options depending on the funds you chose to invest
Life Cover Yes Yes, but not too high

5 Benefits of Traditional Insurance Plans

Traditional plans offer multiple benefits to you in case you plan to buy one. Below are some of the benefits of traditional insurance plans

1

Maturity Benefit

At the time of maturity, you receive a lump sum amount depending on the amount you have paid as a premium (except term insurance plan).

2

Death Benefits

If the policyholder passes away, the beneficiary receives the basic sum assured along with the bonus, if any. The amount received can be used for paying off any unpaid debts and liabilities. It can also be used by the beneficiaries to continue manage their lifestyle expenses.

3

Income Tax Benefit

The premium you pay towards traditional plans is eligible for tax deduction every year as per Income Tax Act in India.

4

Risk-free

Your returns are risk-free, and you have an idea of how much amount you will receive and when. It helps you plan your future in a better way.

5

Additional Covers

Traditional insurance plan comes with inbuilt riders like Accidental Death Benefit. With some plans, you have an option to add multiple riders to enhance your current insurance plan.

Who Should Buy a Traditional Insurance Plan?

There are several life insurance plans in the market because different people have different financial requirements and needs. A traditional insurance plan is best suited for you if:

  • You have a low-risk appetite: The traditional insurance plans are risk-free and ideal for you if you want safe and guaranteed income.
  • You are looking for regular income: These plans are an excellent source of regular income and provide financial stability. For example, a money-back plan gives you a regular income at fixed intervals to help you accomplish different goals.
  • Looking to protect your family's future: If you are looking to secure the future of your family, under all life situations, then you should buy a traditional insurance plan with high death benefits.

Traditional Plans v/s ULIPs

The table below shows features of both the plans

Criteria Traditional Insurance Plan ULIPs
Purpose Pure insurance scheme Investment cum insurance scheme
Reason to buy Fixed returns over the long term Gives insurance plus investment benefits over the long term
Regulated by Insurance Regulatory and Development Authority of India. Insurance Regulatory and Development Authority of India.
Risk Risk is low The risk depends on the choice of funds one decides to invest in
Returns Returns are low since the risk is low Returns are market-linked and depend on the investment fund
Who Should Buy? If you want protection against mishaps in life and are fine with low returns If you are looking for higher returns on your investment along with a limited amount of life cover
How is your money invested? Invested in low-risk instruments and a part goes to insurance coverage. A small percentage goes to the insurance company to manage your funds You have the option to choose where your money is invested. A part goes to insurance cover and a small part goes as commissions to the insurance company
Tax Benefit Yes, under Section 80C Yes, under Section 80C
Lock-in Period Until maturity Usually, 5 years, varies from company to company
Secure Yes, highly secured Less secured compared to traditional plans
SIP Not allowed Yes
Option to switch funds No Yes
Investment Horizon Long term Long term

Different Types of Traditional Plans

The best money back plan helps you achieve both your medium and long-term goals. It also gives you a life cover. Here are some features of the best money-back policy:

Endowment Plans

This is an insurance plan that offers you a combination of saving and insurance. In this plan, a part of your premium goes to life cover. The remaining amount is invested for good returns. If the policyholder outlives the policy term, he receives a maturity benefit. In the event of the death of the policyholder, the nominee gets the death benefit.

The plan also offers regular bonuses that get added to your corpus. The bonus amount is either paid on maturity to you or as a death benefit to your nominee, along with the sum assured. The returns are lower since the risk is zero in the endowment plan.

Money-Back Insurance Plan

This is a unique insurance plan that gives a percentage of the sum assured to you periodically as a survival benefit. You can use the regular payment received to meet your short-term goals. If the policyholder passes away, the nominee receives the sum assured (in addition to periodic payment received by the insured).

For example, if you buy a 20 year money-back policy with a sum assured as Rs 10 lakh. You will receive 20% of the sum assured every five years. So, you will receive Rs 2 lakh in the 5th policy year, 10th policy year, 15th policy year, and the remaining on maturity along with bonuses if any.

Term Life Insurance Plan

These are the simplest form of life insurance plans and very easy to understand. These are very affordable plans and should be considered by everyone. With a term insurance plan, you get death risk cover for a specified period. The period could be 10 years or 30 years. In an unfortunate event during the policy term, the nominee receives the death benefit. It is a pure risk cover plan, and hence the premium you need to pay is low.

You also have an option to add riders to the plan and widen your coverage. The death benefit is paid to the beneficiary as monthly pay outs, lump sums, or a combination of both. If the insured outlives the policy term, there are no pay outs or maturity benefits.

Whole Life Insurance Plan

Whole life insurance gives you life cover for a lifetime (up to 100 years of age in some policies). In case of the demise of the policyholder, the nominee receives a death benefit along with bonuses, if any. If the insured outlives the age of 100 years, they receive a matured endowment coverage from the insurance company.

You have an option of partial withdrawal after the completion of the premium payment term. The premium for a Whole Life Insurance plan is slightly higher compared to the term plan.

How to Buy the Best Traditional Insurance Plan

There are different types of traditional insurance plans, and they differ in terms of the benefit they provide to you. In general, a traditional insurance plan works as below:

  • 1 Choose the type of traditional life insurance plan you want to buy.
  • 2 Select the type of insurance coverage you want, if given an option.
  • 3 Choose the riders you want to add if allowed.
  • 4 Choose if you want to cover your spouse in the plan.
  • 5 Choose the policy term and calculate the premium required you need to pay.
  • 6 You start paying the premium as specified in the policy. Below scenarios can happen during the policy tenure:
    • You outlive the policy tenure: In this case, you will receive the maturity benefit along with bonuses (except for Term Life Insurance). In the case of money back policy, you also receive regular pay outs.
    • Policyholder passes away: The nominee receives the sum assured along with bonuses if any.

FAQs

What is an insurance plan?

An insurance plan is an agreement between an insurer and insured that offers financial protection to the insured in case of any unforeseen life situations. The insured pays premiums as per the plan's terms, and the insurer promises to pay the sum assured.

What are guaranteed income plans?

A guaranteed income plan is a scheme where you are entitled to receive a guaranteed return upon your investment irrespective of market or fund performance.

What are the benefits of a traditional insurance plan?

The traditional insurance plan offers the below benefits:

  • they are a risk-free investment
  • offers death benefit
  • help you create corpus over time

Is ULIP a good investment option?

Yes, ULIP is an excellent investment option for you if you are looking for dual benefits of life insurance cover and investment with higher returns. The risk is slightly higher in ULIPs.

Read More

What is the difference between ULIP and SIP?

The major difference between SIP and ULIP is that ULIP offers you a life insurance whereas SIP has no such facility. ULIPs are complete self-functioning funds, whereas, in SIP, you have to put money at regular intervals into a mutual fund.

Read More
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