Which insurance plan to choose? Protection based or savings based?

Buying insurance can often be cumbersome for a regular person who does not belong to the industry or delves deep into it. For the sake of clarity, we’ll divide life insurance plans into two segments – protection based plans and savings based plans.

What is a protection based insurance plan
Protection based insurance plans are those which offer you a complete life coverage. Typically, term plans are the best example of a protection based plan where your premium is completely used to offer you protection. Protection-cum-investment plans like ULIPs offer you protection as well as an investment component.

Both of these types of policies have their own uses. While people are often found asking which one to opt for, the answer would depend on what their objective for life insurance is. That is primarily because the goal of these two types of insurance plans is different.

Why should you opt for protection based insurance plans

Higher coverage with lesser premium
Since protection based plans only offer a payout on eventuality (in other words when somebody dies or becomes permanently disabled), the premium involves only the risk cover. As a result, the premium is often lower. This is helpful if you’re looking only to leave behind a certain sum for your family and not worried about creating wealth or savings.

For example, for a 25 year old, to get an insurance cover of Rs. 1 Crore, he need to pay around 11,000 annually in case of a pure term plan. But if it is an endowment plan with the same company, the annual premium may come around 5 lakhs to get the cover ( depending upon the plan).

Entire premium goes to protection component
In a term plan, the full premium is allocated towards your protective component. In ULIPS, the number of expenses like allocation charges, policy admin charges, mortality charges, fund management charges etc to name a few add up for almost 12-15% of the premium. So for example, if you are paying Rs. 100 towards a premium for your ULIP plan, only Rs. 85 goes towards investment.

Why should you opt for savings based insurance plans

It assures returns for the investment
While protection based plans would offer financial protection in case of a particular event (in most cases, death or permanent disability), savings based plans offer the ability to grow your savings in addition to providing limited financial protection for your life.

As a result, while protection based plans specialises only on providing financial cover, savings plan can offer the dual benefit of protection as well as building wealth for you.

Bottom line
The uncertainty of life and adequate financial security to your dependants will be better served if you have a term plan in the event of your unfortunate demise. Protection plans come with a lower premium as compared to investment based plans which remains static for the full tenure of the plan, making it more cost effective.

Savings based plans may appear to be more attractive but unless you have one pure protective insurance plan, opting for savings based plans in not recommended. This is because insurance cum investment plans may not always provide you with sufficient coverage. Even if you opt for a higher coverage, the premium will be much higher.

Traditionally, India has lagged in terms of the number of people having a protection based plans. The typical Indian mentality of making maximum use of one financial product meant that endowment plans were more popular than protective insurance plans.

With insurance companies and IRDA making a conscious effort, protective insurance products have started gaining a substantial increase in sales. Same time, savings based insurance plans today come with lot of flexibility and transparency, unlike yesteryear.

Protection based insurance plan should necessarily be a part of your insurance bouquet and all other plans are secondary or optional.