How To Use Life Insurance As An Investment?
Life insurance plans come in many different variants. While the primary objective of a life insurance policy is to provide coverage against the risk of premature death, you can also use life insurance as an investment. Besides providing financial security, different life insurance plans help you earn investment returns.
Let’s understand what these plans are:-
1. Life Insurance Endowment Plans:
Endowment plans are traditional life insurance policies that help you in accumulating a guaranteed corpus over time. You choose a sum assured, policy tenure, and the premium paying tenure based on which the premium is calculated. You, after that, pay the premiums for the chosen tenure. If the insured suffers premature death during the term of the policy, a death benefit is paid. Alternatively, if the plan matures, a maturity benefit is paid.
Benefits of Endowment Plans:
Endowment plans usually pay guaranteed additions for a specific period during the policy tenure. These additions are expressed as a percentage of the sum assured, and they add to the corpus.
- Loyalty additions might also be paid under some plans after some years of policy continuance. These additions also provide additional returns.
- Endowment plans can be issued as participating policies, giving you the added benefit of the bonus. If the insurance company declares a bonus in a financial year, the bonus gets added to the policy, thereby increasing the sum assured.
Thus, the addition of guaranteed additions, loyalty additions, and bonuses provides good returns under endowment plans and makes them an insurance investment plan. These plans are suitable for individuals who are risk-averse and want guaranteed returns on their investments over a long period.
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2. Life Insurance Money Back Plans:
Like endowment plans, money-back plans are also traditional life insurance policies that help you create a guaranteed saving corpus. However, while under endowment plans, the sum assured is paid on death or maturity in one lump sum, under the money-back plans, you can get regular money back benefits. Money-back policies pay a specified portion of the sum assured at specified intervals, thereby providing you liquidity.
Benefits of Money Back Plans:
It is a participating policy that earns a bonus every year if the insurance company declares a bonus.
- The sum assured is paid in instalments over the policy tenure, which can provide you with funds for meeting your financial needs.
- Money-back plans are also not exposed to market volatility, like endowment plans. Risk-averse individuals can use them to get the benefit of insurance as well as investment.
3. Unit Linked Insurance Plans (ULIP):
Also called ULIPs, in short, unit-linked insurance plans are primarily investment-oriented life insurance plans. These plans work like mutual funds to give you attractive investment returns and provide life insurance coverage in premature death during the policy tenure. Here are some features which make ULIPs unique and help you use life insurance as an investment avenue.
Features of Unit Linked Insurance Plans:
ULIPs pool the money collected from policyholders into an investment fund. This fund is then invested in different securities of the financial market. ULIPs are market-linked insurance plans that invest the policyholders’ premiums in market securities and stocks.
- There are different types of investment funds offered by ULIPs. You can choose any investment fund based on your risk appetite and investment strategy. There are equity funds for risk-loving investors, debt funds for risk-averse investors, and even balanced funds for those of you who want a mix of equity and debt investments.
- When you buy a ULIP, you choose the investment fund(s). After that, the premium that you pay is directed towards the chosen fund. If the fund performs well, the Net Asset Value (NAV) of the fund increases, and you earn a return on your investments.
- ULIPs allow you various flexible benefits. You can withdraw from your fund value partially after the completion of five policy years. You can also pay an additional premium through top-ups if you want to invest more. Lastly, the switching facility helps you switch between the investment funds whenever and however you want to manage your investments.
- The money that you invest and the benefit received from a unit-linked policy are both completely tax-free. Moreover, when you switch your investment between different funds, you don’t attract tax. Thus, ULIPs also allow you unmatched tax benefits making them an ideal investment insurance policy.
- ULIPs are suitable for those who are looking for non-guaranteed but inflation-adjusted returns. Since the premium is invested in market-linked securities, the returns generated by ULIPs are in sync with market trends. ULIPs, therefore, help you maximize wealth and also enjoy insurance coverage while you do so.
So, if you are looking for life insurance as an investment, you can choose from any of these three plans. While endowment and money-back policies are for those looking for guaranteed returns, ULIPs are those who want to invest in the financial market. So, assess your risk appetite and investment need and then choose one or more of these insurance investments plans for creating wealth.