5 Reasons To Not Consider Non-linked Life Insurance Plans

Despite ULIP's (Unit Linked Insurance Plan) becoming a whole lot more attractive since 2010, and a concerted effort on the part of the advisory community to drive home the concept of Life Insurance as a risk transfer tool (versus a savings tool), it remains an unfortunate truth that the bulk of premiums paid by us Indians still flow into Non-Linked policies. Also known as 'traditional' policies, these plans do very little to add value to your financial life. If you're considering taking up one, here are five good reasons to drop the idea.

They front-end hefty commissions
Typically, Non-Linked plans front-end anything from 35% to 70% of your first-year premium as a sales incentive or commission to your agent. How does this affect you? In two ways, actually. One, since these generous commissions are coming out of your money, this practice will have a material and tangible impact on the returns these products can generate for you. Two, since your agent will have made a killing up front itself, he or she will have very little incentive to assist you with post-sales service once you're past the 15-day free look period.

They earn low returns
Non-Linked plans are mandated to invest at least 50% of their portfolios into Government Securities. The yield on the 10-year G-Sec is just about 6.5% these days. The front-ending of commissions, coupled with the mandated conservatism when it comes to portfolio management, actually makes it very hard for Non-Linked plans to earn you anything more than '10-year yield minus 100 basis points' as a return. What this means is that if you take up such a policy today, you need to be prepared to earn just 4.5% to 5.5% per annum by way of returns, if not lower. The shorter the policy tenor, the lower the returns.

They only have a sliver of life cover attached 
Scan through the policy brochure and it may surprise you to discover that the Non-Linked Life Insurance Plan you've been considering adds precious little value as a 'life insurance' tool per se. Even if you're paying a premium of Rs. 50,000 per annum for 20 years, you're likely to have a death benefit amount that ranges between 8 lakhs to 12 lakhs at any point in time. Such an inconsequential amount is obviously not going to help your family tide over the worst possible crisis. Ditch the Non-Linked plans and opt for a pure term plan instead. You will most likely have to pay Rs. 10,000 or so per annum to achieve a death benefit of Rs 1 Crore!

They have poor liquidity
Non-Linked Plans have very poor exit options. They do not attain a surrender value until after you've paid the third premium, and post that, the amount you can recoup from the plan in any given year builds up gradually to 90% or so over several years. In other words, these plans will be of little use if you require access to your capital in an emergency situation.

They're not inflation-proof
Since their 'returns' aren't really returns per se, but rather just a percentage of the "sum assured" (a fixed number) that is strapped on to the policy value and paid out much later, these plans are not inflation proof. Chances are, when your policy matures, your contributed amounts will collectively be worth less than what they were when you invested them, in real terms.