Insurance is often considered an avenue for investment. It is why people frequently choose Unit Linked Insurance Plans (ULIPs) over traditional policies. Nevertheless, the usefulness of insurance actually comes into play when a family requires financial stability following the death of its principal earning member. It also proves handy when planning for a wedding, buying property or footing the kids' college fees.
Thus, insurance is more than just another investment option. It is your saving for a rainy day. Seen from this perspective, the traditional policy offers numerous benefits. But before we focus on the advantages of such policies, let us define the traditional policy.
What Is a Traditional Policy?
A traditional life insurance policy promises coverage up to the policyholder's death or until he/she turns 100. The annual premium amount is fixed for the duration of the policy. The policyholder's failing health or the insurer's rising costs do not affect the premium amount. Moreover, the policyholder has the option of borrowing on the accumulated cash value when the need arises. Endowment plans, whole life plans, money back plans and children's plans are common types of traditional policies.
Benefits of Traditional Policies
1. No Risk – One of the biggest advantages of the traditional policy is the no risk factor. You can rest assured that you will receive the pre-decided amount following maturation of the policy or death of the policyholder. Non-traditional products like ULIPs do not offer the same guarantee and are affected by market crashes. This is why their popularity has dropped since the global economic crisis struck in 2008. A traditional policy may not offer higher returns, but it promises security of investment.
2. The 90/10 Rule – Why is the traditional policy a safer option? It all boils down to how the insurer manages the investment and shares the proceeds. ULIPs work for policyholders who are conscious of the associated investment risks. Policyholders who are less aware would do better to spend on a traditional policy where the risk lies with the insurer. In the latter case, the insurer invests more cautiously. The returns may not be high, but the investment is secure. Moreover, insurers can pocket only 10 percent of the profits accrued to a traditional policy; the remaining 90 percent goes to the policyholder.
3. Building a Fund – A traditional insurance policy is always a long-term plan. Thus, it enables the policyholder to save in a disciplined manner over several decades. The premium payments are reasonable and in line with what the policyholder can afford. Nevertheless, these small savings add up over the years. By the time the policy matures, you have a large sum at your disposal to use as you please. (This does not hold for money-back policies though.)
4. Fixed Premiums – As mentioned earlier in this article, the premium payments are fixed at the very beginning. Unlike in the more profit-oriented policies, traditional insurance premiums are not subject to change mid-way through the policy. This adds to its appeal. As a result of the fixed nature of the premiums, policyholders can also pay off the entire premium amount at one go. Alternatively, they could pay on a yearly, half-yearly or quarterly basis.
A traditional policy offers unmatched investment security. Nevertheless, choose wisely when purchasing insurance. Find the product that fits your requirements in the best possible way.
The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal
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