Embedded Value – ULIP: Insurance is about safety, not returns
This unique safety is also
needed by the people who want to save with high guarantee of reasonable
returns on the amount saved every year.
April is the first month of the financial year; hence the most apt time
to plan one’s expenses and savings for the next 12 months. An individual
first needs to provide financial protection to his family and life
insurance emerges as the first among several very attractive tools of
saving for one’s future. A life insurance policyholder creates an estate
for his family worth the sum assured chosen by paying the very first
instalment when his proposal is accepted by the insurer. The sum assured
guaranteed to the family in case of the unfortunate passing away of the
bread-earner may be any sum 10 to 100 hundred times or even more of the
annual premium.
No other savings instrument can yield such ‘returns’ in any
circumstance. The policyholder therefore is not an investor but simply
the provider of financial security to his family or to himself in old
age by receiving the accumulated value as the maturity amount. The unit
linked insurance policies (Ulip) are marketed to the prospects as an
opportunity to be an investor in the stock market through a life
insurance policy. Such a wraparound for the linked policies has been
designed to enable the policyholder to enjoy the benefit of stock market
yields along with life insurance protection.
Yield under a Ulip policy is never equal to a pure equity investment
because the capital invested is reduced every year by cancellation of
units to generate fund for payment of risk premium every year. This
erosion of fund ultimately leads to a substantially lower return. Hence a
policyholder must not have the illusion that he can get very good
returns on his investment through Ulip.
Buy life insurance early
Both life insurance and market investment need to be adopted early; the
former yields the benefit of lower premium while the later yields the
benefit of compounding. In investments, compounding leads to rapid
building up of wealth whereas in insurance the difference enjoyed by the
early bird is not so significant. Some intermediaries use the word
‘investment’ while marketing endowment policies or policies with
guaranteed returns but this is not at all fair to a prospect. The
policyholder’s decisions are influenced by emotions and not by hard
figures or the market conditions. Hence he must be made to understand
that his money will be safe with moderate growth and he need not keep
tracking the market or fear a market crash.
While an investor has to be active in the market regularly to protect or
to make his investment grow, the policyholder has to just let the
insurers do the job to honour their promise. The conservative investment
approach safeguards the policyholders from any unexpected fall in
returns. The insurers are thus able to announce reasonable allotment of
the reversionary bonus to all the policyholders having with-profit
policies.
This unique safety is also needed by the people who want to save with
high guarantee of reasonable returns on the amount saved every year. But
any return so earned by the policyholders cannot match the returns
usually earned at the bourses. The stocks in an emerging economy like
ours can provide an average yield of at least 10% per annum in 20 years
or so but such an ambition is fraught with risks of market collapse. So,
when it comes to choosing investment avenues it is correct to say
‘Sabse pehle life insurance’ (life insurance before everything else).
