Should You Mix Investment with Insurance Plans?
For a secure future, both investments and insurance form a crucial part of one’s portfolio. Now, there are several plans which combine both and offer life coverage along with periodic returns. However, should you combine investments and insurance?
Keep reading this guide to learn the pros and cons and make an informed decision.
What are the Merits of Mixing Investment with Insurance?
The following are the major advantages of merging investment and insurance into one financial product:
1. Dual Benefit of Protection and Returns
Combining investment with insurance addresses two financial goals within a single plan. On the one hand, they offer life insurance protection that provides financial security for the family in the event of the policyholder's premature death.
On the other hand, they serve as long-term investment instruments that yield returns on recurring premiums, making them a convenient choice for investors seeking thorough financial planning.
2. Suitable for Risk-Averse Investors
In countries like India, many individuals are uninformed about finance, particularly in areas such as risk management and insurance. Most of them are unwilling to buy insurance, as they view it as a 'loss' if they do not make a claim.
For such people, guaranteed return insurance plans can be an excellent choice. They are a type of savings plan that offers life insurance coverage, allowing you to save in fixed amounts over the long term and receive assured returns upon policy maturity.
3. Tax Efficiency and Benefits
These plans are tax-beneficial in several ways. One can claim the paid premiums under Section 80C of the Income Tax Act as a deduction. More significantly, the proceeds on maturity are tax-exempt under Section 10(10D), and so the return after taxes is more appealing compared to most other traditional investment tools.
What are the Demerits of Mixing Investment with Insurance?
Mentioned below are some of the disadvantages of combining investment and insurance into a single financial product:
1. Lack of Proper Insurance Coverage
One of the biggest disadvantages is the potential for misinterpreting what the product actually offers. Although plans combining insurance and investments come with life cover, it typically falls short of full family protection.
In general, people require much greater coverage, which only a term life insurance policy can offer at an affordable price. Thus, considering such combined plans as the exclusive means of life insurance may leave dependents in financial jeopardy.
2. Complexity in Evaluating Returns
Computing and comparing the return on investment from combined products like ULIPs is not easy. Due to their unified nature, multiple fees, and complex structures, it becomes challenging for the common investor to determine real gains and compare them with inflation or other investment alternatives such as mutual funds or PPF.
3. Lower Return Focus and Opportunity Cost
Except for ULIPs, the majority of such products focus on the return of capital rather than the return on capital. Such a conservative design tends to generate returns which are not as competitive as those of other market-linked instruments.
Those who expect real wealth generation may prefer more favourable results through differentiating between their insurance and investment choices.
4. Long-Term Financial Lock-ins and Penalties
These plans involve a long-term investment in terms of periodic premium payments for a specific number of years. Pre-exiting before maturity not only lessens the benefits but can also incur heavy surrender charges or deductions, leading to the loss of capital. This might cause a strain on finances for those who could be in need of liquidity or flexibility during the policy term.
Types of Investment Insurance Plans
If you plan to opt for a combined investment and insurance plan, make sure you are aware of the different available types. Such plans differ by risk, return, and payment plan, each catering to varying goals. These include:
1. Participating Plans (With-Profit Plans)
In this plan, your premiums will be invested in the insurance company itself. Each year, the insurer can announce a bonus based on its profits, which will contribute to your returns.
If the company does well, you receive a better bonus and vice versa. These plans are ideal for those who are comfortable with moderate, performance-based returns but want some stability.
2. Unit-Linked Insurance Plans (ULIPs)
ULIPs blend life cover with market investments. A part of your premium provides life cover, while the rest is invested in equity, debt, or balanced funds. Their returns are based on market performance, so there is more opportunity for growth, but at the same time, higher risk. ULIPs are suitable for long-term investors with a greater appetite for risk.
3. Savings Plans (Money-Back or Endowment Plans)
These are designed for those who prefer assured returns. You pay premiums and get a lump sum at the policy's maturity, occasionally with periodic payments and extra bonuses (if declared). These are suitable for risk-averse investors who would like predictable, constant returns and an annuity at maturity.
4. Retirement Pension Plans
These plans are designed to help you accumulate a retirement corpus while also providing insurance coverage. Most of them are designed as ULIPs, but to create a regular income after retirement. You need to invest for a duration and receive annuity returns in your post-retirement life.
Is a Combined Plan Suitable for You?
It varies with your investment goals, risk tolerance, and insurance needs. If you want disciplined long-term investing with simple life cover, combined plans can be a convenient and tax-efficient option.
However, when it comes to higher returns and sufficient coverage, keeping insurance (through a term life insurance policy) and investments (through mutual funds or PPF) separately tends to be more transparent, flexible, and cost-effective.
Although the concept of tying investment with insurance may sound appealing, it usually comes at the expense of lower returns, less flexibility, and complicated fee structures. For most individuals, keeping life insurance and investment separate leads to improved financial results.
However, guaranteed return insurance plans can provide reassurance for conservative investors or those who want assured returns. Make informed choices based on your objectives, not the product's assurances.
