Variable Life Policies, Universal life policies, Equity linked plans are all fancy products that have taken the insurance industry by storm and we see billboards and internet sites splattered with newer and newer products everyday. Some companies offer a guaranteed income, where some guarantees the purchase price, with potential limitless upside. Note the word, "potential". Where in the traditional products, we used to pay a certain amount of premium every year which grew slowly but steadily over long term, these new products promises you potential immediate returns that are beyond our imaginations.
With all these fancy products on the market, we have all forgotten about the good old Term policies, whole life plans and those ubiquitous money back plans. I have always been a great fan of term insurance plans, and being an active investor, I find the concept of equity linked products to be stupid, however popular they may be.
A stand alone level term plan is the cheapest form of insurance and will give you the biggest amount of protection for a very affordable premium. With the rising popularity of many quote comparison sites, insurers and carriers undercut each other and now term policies are available at very low prices. Also, when one goes for an insurance plan, he or she should assess how much protection or cover he needs to buy. The basic purpose here is to provide protection in the advent of an unforeseen event, and buying a cover of a 100 thousand is very small, and you can only afford a 100 thousand or lesser cover if you were to go for a fancy insurance product.
Whereas equity linked variable policy looks very fancy, the amount of fees and deductions inbuilt in those policies will make the return diminish if you look at it from an investment perspective. If you really want a good market return, you should first allocate some amount to a level term policy and invest the rest in a good Mutual fund, based on your risk appetite and your profile. For example, a younger person may go for an aggressive high growth equity only fund, whereas an older person could go for a balanced fund. An equity mutual pays very well in the long run, so the younger you are the better you are building a substantial corpus for your retirement.
Investment and protection should not be combined. Even though many of the variable insurance products also give enough flexibility as a mutual fund would, chances are that you might not be able to buy enough over when you are buying a variable policy. i.e. a life cover of 1 million will be unaffordable for an average person, if he were to buy a variable product, whereas, he would be able to afford a Term policy easily. After getting adequate coverage, he should invest the rest in a reputed mutual fund.
The basic purpose of buying a life insurance must first be to adequately provide a life cover or protection, which is the amount money that, when kept in a fixed fund, will provide the same level of financial you are providing to your family today.
Forget the fact that in a term life product, you don't get anything in return if you survive the term stated in the policy. The premium you paid is the price of the huge cover that might have protected your loved ones if you had not survived the term.
If you don't want to buy a term policy for various other reasons, I would recommend a basic whole life policy, and if you do get a variable whole life policy with lesser fees, you may go for it. You even want to try one of those new TROP plan, which means Term with Return Of Premium, which is self explanatory.
Bob works as a subject matter expert in a multinational insurance company and he likes to write about investments and wealth management.
