Aditya Varma, a software engineer by profession, had begun married life a couple years ago and is blessed with a daughter. Joy has in no time been overtaken by the worries of securing his family financially — both during his life time and thereafter.

His friend and insurance agent Umasankar Patra, whom he got in touch with for advice, bombarded him with several policies, making his task of zeroing in a suitable policy an uphill task.

Mr Verma is not the only one baffled by financial data and legalese that one inevitably has to comprehend.

Insurance policies are broadly categorised as unit-linked, term policy and endowment policy.
While some plans offer only life cover, others provide life cover with money back or lump sum return on investment.

The endowment, pure life and money back insurance policy are very popular among investors. Let’s discuss the various aspects of these policies as sparing a little time to understand the insurance products could help you in making an informed decision.

Endowment insurance policy

Such a policy permits life cover for a fixed term — say 10 years, 20 years, etc. If the insured lives through the maturity per-iod, he is entitled to receive the assured amo-unt at the time of maturity. It is further classified into two plans — endowment plan with profit and unit-linked endowment plan with profit.

Under the endowment plan, if the insured dies before the maturity period, the nominee receives the sum assured along with bonus, profit and/or guaranteed addition if any. The premium for an endowment policy is usually higher than the term plan.

The endowment plan is advised to the insured when he wants to save and cover his or her life. If the insured wants to cover only life, it is advisable to opt for a simple term plan.

Money-back policy

Insurance plans that cover life risk and only return the money regularly during the policy tenure are called money-back policies.

Let’s assume a person had purchased such a money-back policy for a 15-year tenure with an assured sum of Rs 12 lakh.

The plan would offer the insured 10 per cent of the sum assured after the completion of first three years, 15 per cent after six years and similarly a predetermined percentage of payment in fixed inter-vals in the remaining years.

If the insured dies before the completion of the ten-ure, the nominee is entitled to receive the assured amount without any ded-uction of the sum already paid to the assured.

The bonus receivable by the insured is calculated on the full amount assured. These plans at times also offer guaranteed additions and annual bonus, which add to the money back amount every year.

Which plan is more suitable?

The suitability of the endowment plan and the money back plan varies for different age groups.
The endowment plan appeals more to the young people who are starting their careers and are unable to spare much money due to other needs.

It allows the insured to mortgage the policy, if required to raise money based on surrender value.
The person who is settled and in the middle of his career should prefer money-back policy as they have many regular expenses and it can be easily met by the money received through the money-back policy.

While buying an insurance plan, the charges should be kept in mind. It can attract heavy charges on surrender and will even erode the benefits accumulated in the plan.

Pure life cover

Though different combinations of insurance seem to appeal to various individuals, one should reme-mber that money from investment in these policies offers the least return when compared to other avenues.

An insurance product offers a return of a mere three per cent to five per cent, whereas other financial instruments such as a fixed bank deposit, PPF and mutual funds offer a return of more than eight per cent per annum.

Therefore, it is more appropriate for a person to customise the insurance and investment plan as per one’s own requirements after careful evaluation.

If a person wants both life cover and investment, it would be more profitable to buy a term policy for life cover, which com-es at an affordable price, along with an investment in fixed deposit or PPF or MF for better returns.

If somebody buys a traditional insurance policy like endowment plan or money back plan, the investment period is very long i.e. around 20 years.

With a low return from such traditional policies, the value of investment diminishes slowly, with the rate of inflation more often than not exceeding the rate of return from insurance.

While other investment products provide greater return than the rate of inflation, they provide a better hedge against the time value of money in the long run. The other benefit of customising is that a person has the flexibility to vary the amount of term insurance cover and the corpus invested.

The writer is CEO of BankBazaar.com