Traditional Insurance Plans primarily offer a combination of protection and savings benefits to customers. Popular Traditional Insurance Plans are the Endowment Insurance Plans and the Whole Life Insurance Plans. These plans broadly include features such as life insurance cover, guarantees, returns, safety and tax benefits. Traditional policies are considered risk-free, as they provide fixed returns in case of death or maturity of the policy. Investment guidelines given by the regulator (IRDA) also ensure safety of funds with a cap on equity investment for the underlying participating fund in which all monies are invested.
In participating plans the company can earn margins only when the customer earns margins and to that extent the interest of the company and the customer are aligned.
As per the insurance law, the company can retain only 1/10th of the profits with 9/10th of the profits being shared with the customers. This is known as the “90/10” rule (As per IRDA (Distribution of Surplus, Regulations 2002) in the insurance industry. For example: If the company makes Rs 100 as profits, Rs 90 has to be given to the customer first.
In Unit Linked products the investment risk lies with the customer. On the other hand, in traditional participating products, this risk lies with the company. Traditional Insurance Plans are apt for customers who are risk averse and do not actively participate in managing the investment.
Traditional participating plans offer in-built guaranteed benefits hence the ‘give and get’ equation is fairly simple to comprehend. The product benefits are specified at the outset with lesser dependencies on external factors, making the product extremely simple to understand.
All in all, Traditional Insurance Plans are an ideal fit for the passive investors as they provide dual benefits of guaranteed returns and protection. If your investment objective is long term savings with safety and guaranteed returns, then Traditional Insurance Plans are the best investment product for you.