Why Buying Insurance Is Your Best Investment Plan?
Nidhi is 36 years old and single, with no intention of marrying in the future either. She wishes to retire after 20 years. She has savings of INR 10 lakhs and wants to plan vigorously for the next couple of decades for her retirement without taking too many risks. A friend suggested that she include insurance in her financial plan, but she was a bit confused. She thinks insurance is not ‘worth it’ due to low ROI (Return on Investment). In reality, Nidhi’s knowledge about insurance products is rather limited, as buying insurance (wisely) can be the best investment plan.
The question is, how is insurance your best investment plan? In a volatile market, you need an investment option that provides financial security and grows wealth. Hence, life insurance can be the perfect tool for someone like Nidhi (in our case).
The critical thing is to use life insurance to its fullest potential. Different categories of life insurance (such as term, endowment, whole-life, retirement plans, etc.) can provide excellent returns and future financial security to investors.
This guide will explain how to use insurance as an efficient market tool to achieve your financial goals.
What Is Investment Insurance?
Insurance and investment have coexisted forever. Investment insurance is a financial product that aims to combine conventional insurance's protective benefits with investment opportunities. If you invest in such products, there is a hope of getting the ‘best of both worlds.’ A part of the insurance premium is used towards ‘sum assured’ or ‘death benefit,’ and the remaining is invested in financial instruments to grow your investment. Since the investment component is linked to the financial markets, you get a fair bit of return that can help accumulate wealth while giving you life cover throughout the period.
There are two popular investment insurance plans:
1. ULIPs (Unit-Linked Insurance Plans) are like mutual funds, where your money is invested in different schemes tailored to your risk profile. The difference is that a portion of the investment is set aside to cover death risk, providing comprehensive coverage.
ULIPs combine investment growth with insurance cover, offer fund-switching flexibility, and provide significant tax advantages.
2. Variable Universal Life Insurance (VUL) is similar to ULIPs because it allows you to invest in different asset classes. The difference is the added flexibility in premium payments and the death benefit, which suits more dynamic investors.
VULs provide adjustable investment and insurance features, allow diverse asset class investments, and offer the potential for high returns.
Returning to Nidhi’s example, she can choose either of the two investment options to achieve her long-term retirement goals. Here is what her expected corpus shall be at the end of 20 years:
Particulars | ULIP | VUL |
Total Premium | INR 1.5 Lakhs | INR 1.5 Lakhs |
Allocated for Life Cover | 50,000 for INR 1 crore death benefit | 15,000 (is variable, can be changed) for INR 15 lakhs death benefit |
Admin. Costs | INR 5,000 | INR 7,500 |
Investment (in the market) | INR 95,000 | INR 1,27,500 |
Expected ROI | 12% | 9% |
Years | 20 | 20 |
Value after 20 years | INR 68,44,982 | INR 65,22,915 |
Value of FD invested @7% PA for 20 years | INR 38,69,684 | INR 38,69,684 |
Total Retirement Corpus | INR 1,07,14,666 | INR 1,03,92,599 |
ULIP vs. VUL Insurance Plan for Nidhi’s Retirement (Workings Here)
Towards the end of the tenure, the returns from both options were quite similar. However, the risk covered by ULIP was higher throughout the period, making it a more reliable alternative for an individual.
How Investment Insurance Works?
Here is how investment insurance works for a policyholder:
- Premium Payment: Depending on the terms, you can pay premiums monthly, quarterly or annually. A proportion of the premium is allocated to insurance costs and administrative expenses, and the remaining is invested in the market (in the asset class communicated to you).
- Fund Allocation: Based on your financial goals and risk tolerance, you can allocate the funds to equity, debt, or hybrid funds.
- Investment Growth: The ROI of the funds depends on the market conditions and performance of the underlying assets.
- Flexibility: With VUL, you can increase or reduce the life coverage and investment portion. This facility might also be offered to customers in a few ULIPs.
- Long-Term Benefits: You receive long-term benefits through tax-free payments that help in retirement planning, education funding, or wealth creation.
10 Reasons Why Life Insurance Is a Smart Investment
If used wisely, life insurance can help attain long-term financial goals and, hence, is a smart investment option. Here are the main reasons why life insurance can be the perfect tool in your investment journey:
1. Life insurance provides a financial safety blanket throughout the period (of investment) for your dependents.
2. Life insurance can help repay debts like outstanding loans in the event of your unfortunate death.
3. ULIPs and VULs can be excellent tools for long-term wealth creation with insurance by leveraging market returns.
4. Life insurance offers double tax benefits where you get deductions while paying premiums and receive tax-free benefits.
5. It is an excellent tool for funding estate taxes or providing an inheritance.
6. Life insurance helps an individual attain long-term financial goals.
7. A few life insurance policies offer loan options against cash values, offering you liquidity when needed.
8. The premium paying terms can be flexible and personalised, suiting your financial requirements.
9. Tools such as term insurance can be a cost-effective addition to your portfolio, specifically for reducing risks.
10. You will enjoy peace of mind knowing your financial responsibilities will be taken care of even in your absence.
Conclusion
Life insurance goes beyond its traditional role of protection to become a strategic investment. For someone with a low to moderate risk tolerance, it can be an excellent tool for long-term financial security, growth opportunities, and wealth building.
This is a multifaceted investment, and you must use it wisely after analysing your financial goals. If you are yet to buy a life insurance policy, a ULIP or VUL can be two attractive options. To learn more about investment strategies and opportunities, sign-up on Grip Invest today.
Frequently Asked Questions On Insurance Investment
1. Is insurance better than investment?
Insurance can be an investment tool. Options such as ULIP and VUL provide financial coverage and help build wealth.
2. Are the returns from investment insurance guaranteed?
Returns are guaranteed in a few cases (endowment and conventional plans), but they are subject to volatility in market-linked insurance plans. The death cover or ‘sum assured’ is always guaranteed.
3. How should one choose the Right Investment Insurance Plan?
Choosing the right investment insurance plan involves assessing your financial goals, risk tolerance, features, fees, and performance history to ensure it aligns with your long-term objectives.
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