Why You Should Avoid “Traditional Plans” In 2022

The infamous “JFM” tax saving sales push is around the corner, and you’re likely to have a bunch of Life Insurance agents pounding on your door soon. Most of these sales people masquerading as Advisors will aim to trap you into a ‘traditional’ (also known as ‘non-linked’) policy, since these products yield them the highest extend of commissions. Here are 5 reasons why you should be careful to avoid traditional Life Insurance policies in 2022.

Poor returns

When a large chunk of your money is taken away and paid up front to your friendly neighbourhood agent – and the remainder is invested by and large into fixed income assets with a sliver of high growth equities, (not to mention the plethora of other inbuilt costs, such as mortality charges) what sort of returns would you expect to generate? Barely matching FD returns, if not lower. It doesn’t take an investing genius to figure out that 5%-6% returns ae extremely poor over an investing time horizon that could extend to a decade or two!

Opacity

Traditional plans are extremely hard to understand. They are typically shrouded in confusing lingo that ordinary investors simply cannot wrap their heads around. Also, these plans are packaged in a manner that makes their features and benefits look attractive to the untrained eye – for example, the promise of a lump sum of Rs 1 Crore in 20 years may sound great prima facie, but plugging in your contributions into a cash flow table may go on to show that your money will earn sub-FD returns for two decades.

Insurance? Not really!

Ironically, traditional Life Insurance plans do precious little in terms if solving the real purpose of Life Insurance – that is, to safeguard your dependents in case of the unfortunate and unexpected loss of the main breadwinner’s life. With a traditional policy, you’ll most likely be able to achieve a ‘death benefit’ amount of barely 10-15 times the annual premium you’ll be shelling out. You’re much better off signing up for a much higher death benefit amount using a simple term insurance plan with a high claim settlement ratio.

Poor exit options

Exit options in traditional Life Insurance plans are packaged as ‘surrender values’ which are, to say the least, abysmally low. You’ll usually get back zilch within the first couple of years, and anything from 30% - 80% if you choose to pull the plug between years 3 and 10. That’s a very steep price to pay for reversing your decision. Any good investment should ideally allow investors the option to exit, even if it entails bearing a cost. For instance, most Equity Mutual Funds will allow you to exit, bearing a 1% cost.

Low flexibility

When it comes to traditional Life Insurance plans – once you’re in, you’re in for good! Unlike ULIP’s (Unit Linked Insurance Plans) which allow you the flexibility to tailor make your asset allocation to your life stage, financial goals and changing risk tolerance levels, traditional plans do not. There’s nothing you can do in terms of changing the risk profile or time horizon of your investment. Missed premiums lead to lapsations; and if you’re unlucky, the revival process will require a fresh underwriting process.

End Note: Don’t go for traditional or non-linked Life Insurance plans to save taxes. Use term plans to build out a significant death benefit, and ELSS Mutual Funds to fill in your Section 80C gap. Within the Life Insurance space, ULIP’s are a far better long term bet compared to traditional policies.