Insurance means contract in which an individual or entity receives financial protection or reimbursement against losses. To be specific it is protection to the economic value of assets in case of any uncertain event. Having the right kind of insurance is a critical component of any good financial plan.
How does Insurance work?
Insurance is a pooling arrangement whereby contributions are collected from all members who joins a pool. The amount so collected is utilized to compensate members who suffer losses.
Insurance is broadly classified in to two categories.
1) Life Insurance Life insurance is a contract between the policy owner and the insurer, where the insurer agrees to pay a designated beneficiary a sum of money upon the occurrence of the insured individual's or individuals' death or other event, such as terminal illness or critical illness.
2) General Insurance General Insurance or non-life insurance comprises of Property Insurance against fire, burglary etc., personal insurance such as Personal Accident, Health Insurance and liability insurance which covers legal liabilities.
i) Personal Accident Insurance Accident insurance provides a cash cover to a policyholder, if suffers injuries as a result of an accident. While insurance helps a policyholder pay off hospital and medical bills in case of accident injuries, it provides cash benefits to family members if the policyholder dies in the accident.
ii) Health Insurance Health insurance will protect dependants against any financial constraints arising on account of a medical emergency. Basically, the client pays a sum of money called the Premium and in turn the insurance firm would commit to pay a predetermined sum of money to meet the customer's claims.
iii) Disability Insurance Disability insurance, is a form of health insurance that insures the beneficiary's earned income against the risk that disability will make working impossible. It includes paid sick leave, short-term disability benefits, and long-term disability benefits.
iv) Liability Insurance Insurance that provides protection from claims arising from injuries or damage due to negligence to other people or property imposed by law or assumed by contract.
v) Property Insurance Property insurance covers specified property, which may be damaged or destroyed by events of perils, such as fire, storm or theft. This includes specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance or boiler insurance.
|Mutual Fund||Unit Link Insurance Policy|
|MFS follow a product based approach targeting investment needs of the customer.||ULIPS follow a solution based approach and target the life stage needs of the customer.|
|A wide range of things based on various themes / investment philosophy available for the customer.||Limited fund option available for investors to choose from.|
|No Lock-in-period for redemption (except in case of ELSS) Exit load if exit within a year.||No surrender value before 3 years. Redemption possible only after 3 policy years. No Exit load, Exit only after 5 years.|
|No entry load.||High upfront charges (Premium Allocation Charges).|
|Fund Management Charges are High Compared to ULIPS.||Fund Management charges are Lower compared to Mutual Funds.|
|Only investments under ELSS are tax deductible under section 80C. Long term capital gains on equity are tax free but debt is taxable.||All premiums paid for ULIP are tax deductible under section 80C. Entire maturity proceeds are tax free under section 10(10D)|
|Low upfront commissions and trail commission on AUM.||High upfront commissions but no trail on AUM.|
|Zero Entry Load on direct investments||Nil premium allocation charges on direct investments have not been introduced in ULIPS.|
|Fund performance, MFS + Term Plan gives better returns to customer for long term horizon.||ULIPS gives better performance for greater than 12 year’s horizon.|