As per experts, combining a pure term life policy with investment such as mutual funds is a far better option than making an investment in an endowment policy or ULIPs. In India, people choose products such as Endowment Plans or ULIPs, as it offers both life insurance and investment under one plan. People have a thinking that these products provide higher returns that a traditional insurance plan.
But, the question comes up “how effective they are when it comes to insurance protection?”. When you combine both insurance & investment under one plan, you will not receive optimal protection or comparatively better returns.
Aim of Insurance
An insurance plan aims to provide a life cover, which ensures that your family will receive a lump sum amount equal to the sum assured chosen immediately, in the event of your death during the term of the policy. With this life cover, you can provide an adequate financial cover for your loved ones.
In order to ensure financial protection for your family, it would be a wise move to buy a pure life insurance policy.
Should You go for Buying Insurance?
You always want to provide your family all the comforts and luxury. You are well settled & happy with your family, but if something unfortunate happens to you, who will take care of your family. How your family will be able to survive, in the event of your demise. Here comes the role of an insurance policy.
A pure term insurance policy pays the sum assured to your family, in the event of your death. It is thus quite imperative to get yourself insured, so your family can easily meet their desires and aspirations, even when you are not around.
Insurance as an Investment
Things become little gloomy, when combining insurance and investment. Typically, people buy insurance-based investment products with a view that they will receive both the life cover plus returns along with tax saving.
Insurance agents also offer insurance-based investment products such as endowment and ULIP plans to buyers with a pitch that these plans offer higher returns. However, getting an appropriate financial protection for dependents is quite essential, which is available only with a pure term insurance policy.
Actually, insurance and investment are entirely two different areas and it is ideal to put money separately for insurance such as a term life policy and for investment such as mutual funds. With a pure term life policy, you can get a higher life cover at an affordable cost and with mutual funds investment, you can receive higher returns.
Now, let’s take a look through an illustrative example described here.
- Suppose, at 30 years of age, you buy BSLI [email protected] term plan with a life cover of Rs 50 Lacs, you only need to pay a regular annual premium of Rs 5,353.25. So, in case of your unfortunate demise, your family will receive a lump sum of Rs 50 lacs which will be helpful for your family to fulfill their immediate or recurring financial expenses.
- In case you buy Bharti AXA Life eFuture Invest ULIP policy at 30 years with the policy term of 10 years and annual investment of Rs 18,000 for 5 years, you will receive a life cover of only Rs 1,80,000. When it comes to insurance component, you will receive a small amount as a life cover. In a ULIP plan, a major portion of your premium amount goes towards investment and you will get a lesser life cover. When it comes to returns, you will receive Rs 1,30,664 @8% p.a. and this amount is payable as fund value at maturity.
- When it comes to buying a pure investment plan such as you opt for Birla Sun Life 5 Star MM FOF scheme, you will receive the absolute returns of 49.2% over the 3 years of investing.
Spot the Difference:
In a term insurance policy, you only need to pay a small amount of premium for getting a high life cover. Being a pure life insurance policy, the premium amount entirely goes for providing the cover or sum assured, which is payable to the nominee or family on your death.
In case, you buy an endowment or ULIP Plan, which provides a combination of life insurance plus investment, you need to pay a higher amount of premium as it goes towards providing the life cover and investment returns. In this type of plan, the insurer will neither provide you a high life cover, nor you will receive higher returns.
Additional Reading:- What’s Better for Me Endowment or Moneyback
So, instead of putting your money into an insurance plus investment plan, it is a better option to invest with a pure investment avenue such as mutual funds. In mutual funds, your invested amount is directed to generate returns and the resulting, you will receive higher returns.
It is true that a pure life policy, such as a term life insurance does not provide returns, in case of your survival till end of the policy term, but this policy is aimed to getting an insurance cover that becomes helpful in the event of your death (life insured). After getting an insurance cover, you should put your money into an investment plan that can help you to fulfill your financial goals such as buying a home, meeting expenses for children’s higher education, marriage expenses, etc. An investment plan fulfills financial desires for you & your family, when you are alive.
Combining insurance with investment is not advisable. It is recommended to buy a separate life insurance policy and buy a pure investment plan to achieve your financial goals. A pure life policy keeps your family financially secure. It provides the lump sum payment of the sum assured to the family, in the event of your unfortunate demise.
Also, don’t forget to put your money with investment plans such as mutual funds, investing in equities, etc. It provides you the higher returns and helps you to streamline your objectives.