If one is planning financially for their future, Insurance has to be there whether it is a term life insurance plan or other one time investment plan that has an insurance component with it. The reasons for choosing Insurance are simple: it provides financial protection to your family and provides them with a sum assured that could help them sustain through life. However, in recent years, there has been an increasing number of people contemplating insurance as an investing tool. Many investors buy certain life insurance plans with the expectation of making a profit. While it appears to be an appealing option, it is important to understand that insurance and investment are two important financial tools that serve distinct functions.
There are various advantages to investment-cum-insurance plans:
- Dual Benefits: These plans provide both investing and insurance benefits, allowing policyholders to achieve their long-term financial goals while also ensuring financial stability for their family members which is not the case with the one time investment plan such as FD or PPF where the Insurance component is not there.
- Flexibility: Policyholders can adjust the amount of investment and insurance coverage based on their financial objectives and risk tolerance. They can also swap between funds according to their investment preferences.
- Tax Advantages: Investment-cum-insurance plans provide tax benefits under Sections 80C and 10(10D) of the Income Tax Act, making them an excellent tax-saving instrument. However, a proposal proposed in the Union Budget 2023-24 states that if a consumer pays an annual premium of more than Rs 5 lakhs for their traditional insurance policy, the money received upon maturity will be taxed.
- Wealth Creation: These plans offer the ability to build wealth over time through investments in equities and debt funds, allowing policyholders to meet their financial objectives.
- Customised possibilities: Policyholders can tailor their investment-cum-insurance plans based on their specific needs, such as policy length, premium payment frequency, and investment possibilities.
While investment-cum-insurance plans have various benefits, you should be aware of the following drawbacks before investing:
- Comes with high charges: Investment-cum-insurance plans frequently feature high fees, such as premium allocation charges, fund management fees, and surrender charges. These fees might dramatically affect the return on your investment.
- Might be difficult to understand: These plans can be complex, making it difficult to understand the investing and insurance components. This might create uncertainty and make it difficult to make sound investment selections.
- Limited Investment possibilities: Investment-cum-insurance plans have fewer investment possibilities than one time investment plan such as mutual funds, stocks, or bonds. This may limit the diversification of your portfolio and perhaps reduce the returns as well.
- Low Returns: Due to high fees and limited investment possibilities, investment-cum-insurance plans may yield poorer returns than other one time investment plan options.
- Long-term Commitment: These plans require a long-term commitment, and leaving before the maturity date may result in severe penalties and surrender charges.
- Insurance Component might be insufficient: The insurance component of these plans may not provide sufficient coverage for your family’s financial requirements. In such circumstances, you may have to acquire other insurance separately.
Why should you not buy insurance for investment purposes?
Let us begin by stating that insurance and investment are not the same thing. When you invest, you expect a return on your money, whereas a pure term life insurance plan only pays out if you unfortunately pass away. It may appear to be a bad deal, but that is precisely the objective of life insurance: to give financial protection in the event of death.
Unfortunately, many people choose insurance policies that provide something in exchange and so ignore pure term life insurance plan, which are unquestionably the most simple, cost-effective, and dependable type of life insurance.
Investing in an investment-cum-insurance plan locks the policyholder into a long-term commitment that may not yield profits or offer enough life insurance coverage. As a result, even after purchasing such products, policyholders must have separate financial strategies to attain their objectives, as well as purchase separate term life insurance plan to provide their loved ones proper protection.
Why can Equity Mutual Funds be the perfect investment option for you?
An Equity Mutual Fund is a form of mutual fund that invests at least 65% of its total assets in equities from diverse industries and firms. The fund’s asset allocation is overseen by an experienced fund manager. Equity Mutual Funds might be considered a moderate to high-risk investment, but they can also provide substantial profits. If you invest in well-selected Equity Mutual Funds over time, you may be able to meet your long-term financial objectives based on the amount you invest. Investing in equity mutual funds provides many advantages and benefits, including:
- Provide a diverse range of investment alternatives
- Mutual funds that have been carefully selected and thoroughly analyzed can create enough funds to meet your investing objectives while outperforming inflation.
- A Systematic Investment Plan (SIP) allows you to start investing in mutual funds for as little as Rs 500 every month.
- In case of an emergency, mutual funds can be partially or entirely liquidated.
- Mutual funds offer flexibility and variety in investing, allowing you to create a financial plan tailored to your unique needs.
- Diversifying the portfolio can significantly lower the risk of equities mutual funds.
- While mutual funds do not provide tax benefits until invested in Equity Linked Saving Schemes (ELSS), they can provide significantly larger returns than tax-saving insurance-cum-investment plans.
- Equity mutual funds do not give a death benefit because they are not life insurance products.
Why should you invest in equities mutual funds rather than investment-cum-insurance plans to achieve your long-term financial objectives?
Some ULIPs may show to be beneficial in the long run. However, when compared to carefully chosen equities mutual funds in terms of cost, flexibility, transparency, and returns, ULIPs may not be the ideal investment option for long-term goals like retirement, a child’s education, or a child’s wedding.
As a result, it is recommended that you invest in carefully selected stock mutual funds for your long-term goals rather than insurance-cum-investment plans that do not yield good profits or give enough insurance coverage. In addition to investing in equity mutual funds, consider purchasing a term life insurance plan to protect your family’s financial future in your absence. A term life insurance plan provides maximum coverage at a low price, as opposed to investment-cum-insurance plans, which provide life insurance coverage of only up to ten times the annual premium.
