Should You Use Life Insurance As an Investment?
The first mistake you should avoid making is mixing up insurance and investment. Insurance is not to be viewed only as an investment. Sure, it does give you the opportunity to save money in a risk-free manner, but that is not the aim of insurance. The primary and the most important component of insurance is the life cover. Take a look at this article to know why insurance is not to be used only as an investment.
1. Not the purpose
The most important point here is that the purpose of life insurance is not to offer returns on the investment made. The main reason why you should buy life insurance is to cover your life and offer a financial cushion to your family. If you die suddenly, the life insurance proceeds will help your family members to deal with their needs and necessities. This is why you should choose a good plan with a high life cover. The proceeds from life insurance should be able to pay for the education, health care, housing, and lifestyle expenses of your loved ones after your demise. This is the primary objective of life insurance. Investment is just an added benefit.
2. Low returns
As compared to the other investment tools such as equities, the returns earned on a life insurance investment are quite low. The risk associated is low and you get fixed dividends. As a result, the market highs don’t affect your investment and you earn lower returns. If you want to get high dividends, opt for other investments such as mutual fund SIPs and shares.
3. Available in death, not life
And last but not the least, your life insurance proceeds will be available to your family after your demise. You cannot really get the big chunk of the money when you are alive. This is another reason why life insurance is not the ideal investment choice for people who wish to amass wealth within their lifetime.
Keep these points in mind when you choose your investments. It is always a good idea to have a mix of investments in your portfolio. In regards to that, you can have some life insurance investments too. But mix them up with some other investments too and make a finally smart move.
Benefits of life insurance investments
There is an investment component available in life insurance, especially in the endowment plans and the ULIPs. After you realize the primary aim of insurance as a life cover and recognize the investment component as a secondary benefit, you will be able to make better choices. Here are some ways in which the investment component in life insurance proves to be handy:
1. Low risk
The life insurance investment plans allow you to invest with relatively low risk. For example, in an annuity plan or an endowment plan, the interest rates are fixed. Hence, you stand to earn fixed returns and this minimizes the risk. While you stay covered in the insurance plan, your wealth also grows at a steady pace.
2. Assured returns
The returns you earn are assured. Even when the markets rise and fall, there is little impact on the bonuses you earn. So, right when you buy the plan, you get to know what your returns would be and that is the amount you receive as the maturity benefit when the plan ends.
3. Tax benefits
All life insurance plans offer a tax benefit under Section 80 C of the Indian Income Tax Act. You get a tax rebate of up to INR 1,50,000 a year when you pay life insurance premiums.
Keeping these points in mind, it can be said that insurance acts as a good investment too. However, this is just a secondary benefit, over and above the main benefit of providing the life cover.
Choosing the best life insurance plan
If you wish to combine insurance and investment, here are the best options for you:
1. Endowment plans
The endowment plans are very good insurance-cum-investment options. They offer a death benefit and a maturity benefit. If you outlive the policy period, you get the maturity benefit. If you die within the tenure of the plan, your nominees receive the death benefit. This is a very good life insurance investment option.
Unit linked insurance plans, or ULIPs, are another good option for insurance cum investment. Here, a part of the money you pay as a premium is locked in a life fund. The other part is invested in the financial markets. It fetches high dividends and makes your investment grow. Also, you can choose the type of fund for investment, depending on what your risk appetite is. As a result, many consider the ULIP to be the best policy for investment.
3. Pension plans
Pension plans also offer an excellent investment opportunity. You can save money and invest for a smooth retirement phase. The annuity insurance plans give you a chance to build up a retirement corpus over the years while keeping your life insured all along. Explore the various retirement plans and see which one suits you the best.
You cannot get a lot of use out of a term insurance plan when you are looking at a life insurance investment opportunity. So do your research, understand the scope of covers and returns in the different types of life insurance and then choose the best policy for investment.
To sum it up
It is very important for every individual to have good life insurance coverage. Without life insurance, it is very difficult to keep your family safe. A life insurance plan works by offering financial compensation to your family after your demise. Keeping this in mind, choose a good and comprehensive life insurance plan that can protect your loved ones in a comprehensive manner. Thankfully, there are many options available in life insurance. If you can get an investment out of life insurance, you will have an added benefit. Choose a good investment policy and stay covered in a well-rounded fashion.