The earliest records of life insurance come from ancient Rome, where burial clubs pooled money among the poor to pay for members' funerals. A lot has changed since then with life insurance but the importance of life insurance has increased constant. Hedging against the unforeseen has been a human need since dawn of civilization. Mankind has devised many ways to deal with this but insurance with its concept of pooling of risks remains at the core since times of ancient Rome.
There are many types of insurance plans in market today. Traditional plans are those plans where in the investment management is done by the insurance company and the customer does not take an active part in investment. Since investments are managed by the company, these plans also come with some form of return guarantees.
Traditional plans are primarily categorized into two kinds, Non-Participating and Participating Plans. In non participating plans insurance company defines the benefits upfront and assumes the risk of future performance. These types of plans are suited for customers who want very little variability in their returns. Pure Protection plans like term are also classified as non par plans since any variability (positive or negative) experienced by the insurer does not change the terms and conditions for the customer.
In a participating policy the customer takes a share in the insurance company’s profits in form of bonuses. As per the insurance law the company can retain only 1/9th of the profits with 8/9th of the profits shared with the customers. This is colloquially known as the “90/10” rule in the industry. Participating plans are suitable for customers who are looking for a long term wealth creation solutions and are the dominant product category in India as well as the world. These are only savings plans.
The advantage with traditional plans is the predictability they posses. The fact that traditional plans take the onus of managing risks across policyholders, bring stability and predictability to returns makes them the preferred form of insurance for all risk averse, conservative investors.
There are many types of traditional insurance plans like Endowment, Moneybacks, whole life policies, term, annuities etc, which offer multiple benefits in terms of risk cover, return, safety and tax benefit.
Term insurance or pure risk plans are policies offer insurance cover for a specific tenure. However there are no savings benefits. These can come in multiple forms like increasing premium, level premium etc . Then there are whole life insurance policies which provide insurance cover through the insured’s life time. The policy proceeds go to the policyholder’s nominees and this is a great way to create an estate for the next generation.
The most popular form of traditional plans are endowment plans, which help in building a safe corpus for the customers family such as education plans for children , their own retirement or any other needs that they might have in mind. Accordingly there is a vast variety in types of endowment plans offered in the market. The way these plans are structured; their tenures coincide with important life events. A variant of endowment plan is the money back policy which pays back the policyholder a fixed per cent of the sum assured at different time periods during the tenure of the policy. The nominees of the policyholder may get the full sum assured in case the policyholder dies during the term of the plan.
.
World over Traditional Par insurance is much more popular variants. Customers in western markets who have seen market swings empty out retirement funds have come to appreciate the 'risk-return spectrum' of insurance plans as well as the difference between investment and savings. This is why traditional participating products are the recognised as ideal vehicles for long term savings and protection, even in the Indian context.
The author is Director and Head Products and Persistency, Max New York Life