Ask Mint | In Ulips, the insured assumes investment risk

The customer decides whether he wants to invest his money in equity, debt or money markets, but the sum assured is guaranteed on death only

On Insurance | Rajesh Relan

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The insurance business in India isn’t just growing, but also becoming more sophisticated in terms of product offerings. To help readers keep ahead of developments in this business, Mint features a Q&A on insurance every Monday.

What is a traditional insurance plan and is it better than Ulip?

Rajesh Relan, managing director, MetLife

The traditional insurance plan is called traditional because it has been around for many years.

Ulip means a unit-linked insurance plan. It was introduced in the Indian market at the turn of the millennium. In a Ulip, the customer decides whether he wants to invest his money in equity, debt or money markets; in traditional plans, the money is invested in a predetermined manner as decided by the insurer within the guidelines laid down by the regulator. A traditional insurance plan, by and large, has some inbuilt guarantees which assure you a certain sum, both in the event of death and maturity. Many traditional plans also have guaranteed returns over and above this sum assured. Hence, the sum assured plus the returns are guaranteed.

In Ulip, usually the sum assured is guaranteed on death only. Also, in Ulip, you will assume the investment risk and participate in possibly higher returns as well.

I am 39 and earn Rs20,000 per month. I have five life insurance (endowment) policies worth Rs5.6 lakh, with an annual premium of Rs32,000. Please advise me whether the existing policies will cover my insurance requirements.

The human life value (HLV) of a person at your age should be around 10-12 times the annual earnings. This is a thumb rule. The sum insured should be equal to an amount which, if invested, should fetch a regular income for the dependants of the insured. In case there are any liabilities, these should be added to the amount of insurance required.

The life insurance plans taken by you are of an endowment type (that is, a mix of savings and protection). I would recommend you take a pure term policy which will cost you around Rs8,500 per annum and will give you a cover of close to Rs15 lakh for 25 years. This will also depend on your health parameters. If you have children, you also need to invest in a plan with a greater savings component.

Readers are welcome to write in with their queries to askmint@livemint.com. The questions will be answered by senior executives from leading insurance firms.

This week’s expert is Rajesh Relan, managing director, MetLife.