Page 71 - IC23 life insurance application

INTEREST SENSITIVE PLANS:

The permanent plans like whole life, endowment or money back plans, hitherto

marketed are called traditional plans. In spite of the wide popularity of these

traditional plans, these plans have certain inherent weaknesses. For example let us

take an endowment without profit plan and compare it with a term plan. The death

benefit in both plans is the same, while the relative premium ratio is 10 to 1. The

portion of the premium amount which goes to the savings, in case of an endowment,

is available only on maturity, and not before it. Therefore, these traditional plans are

criticized on the following grounds :

1.It lacks transparency, because the savings element is not seen to be growing

during the policy duration until it matures,

2.These plans lack liquidity, because the amount of surrender value, compared to

the paid up value is very small. The policy holder suffers a great loss if he wants to

get out of the traditional plan in the midway,

3.These plans lack flexibility because the policy holder has to pay the fixed premium,

through out the duration of the policy lest he loses the cover,

4.The policy holder has no control over the investment of savings amount.

The interest linked plans - which are called new age plans, are in stark contrast to

these traditional plans. In these plans, the savings portion of the premium is

managed separately from the risk portion. Whenever premium is paid, after

deducting certain portion for risk and expenses, the balance is invested in the

market. This amount grows separately and therefore in case of death anytime during

the policy duration, this savings portion as it stands on the date of death can also be

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