The basic motive of a life insurance policy is to provide life coverage to the policyholder. This means if the policyholder dies within the policy term, the life insurance policy will pay the sum assured to the nominee. The life insurance money can be used by the loved ones to replace the sudden loss of income, pay off debts and create a financial cushion for some time before financial income from other sources can be sorted. In short, life insurance serves as a backbone of one’s financial portfolio. However, times have changed today with the advent of new plans. Life insurance has expanded the range of its benefits. Today, life insurance can also be used as an investment tool. This article will shed light on how to make life insurance an effective financial tool.
Life insurance products if strategically placed into one’s asset allocation strategy, based on the risk-taking capacity of the customer, can work as an efficient method of enhancing one’s wealth. In the past few years, more and more life insurance players have entered the Indian market, and today, the life insurance industry has become more customer-centric due to intense competition. The life insurance products today offer a host of unique features over and above the prime objective of offering life insurance. If used well, some of the products can not only help you save money, but also help with wealth creation.
ULIPs make effective long term investment plans
Today, new and improved ULIPs make a great fit for long term investment planning. ULIPs offer tax benefit and easy shuffle of funds from equity to debt and vice-versa. In the past, ULIPs were not very popular due to the high fee structure but today, the time has changed. All this made the IRDA (Insurance Regulatory Development Authority of India) incorporate new changes to make it more customer-centric and effective plan. The result of new guidelines by IRDA made ULIPs a lucrative life insurance cum investment product. The charges were significantly lowered to compete with mutual fund products. Today, ULIPs have become one of the best new life insurance products, offering life risk cover, tax benefits and market-linked investment opportunity, all rolled into one.
The policyholders of ULIP can select an appropriate plan as per their risk-taking capacity, ULIPs offer low, medium and high risk-taking capacity options. Policyholders also have the flexibility of choosing the investment ratio and the sum assured in the annual targeted premium. Through top-ups, ULIPs also offer the benefit of one-time enhancement in investment. Policyholders who want to reap the benefits of market-linked investment in the long run, without having to take the trouble of direct investment in the stock market can go for ULIPs. ULIPs also instil regular savings habit and offer the option of partial withdrawal every 5 years.
Child insurance plans help you build a corpus for your child’s future. It enables you to strategically save and grow the fund by investing in different child plans available in the market. The child plan also protects your child in case of death of the parent or the policyholder by waiving off all future premiums and ensuring the child insurance plan is active. It gives the lump sum amount on death of the policyholder to ensure financial stability in the absence of the breadwinner. On the maturity of the policy term, the maturity amount is paid out in installments or lump sum, as per the choice of the beneficiary.
Types of Child Insurance Plan
Traditional child insurance plans are endowment based child plans. If the insurer’s performance is good and they make a profit from their investments, then the fund value will grow. Growth of traditional child plan depends on the bonus announcement of the life insurance company. The money in child endowment plan gets mostly invested in debt products so the returns mostly stable.
Unit Linked Insurance Plan (ULIP)
ULIP child insurance plans are getting popular in India. Under these, the premium amount gets invested in the equity market and hence the risk is normally higher when compared with endowment plans. You have the option to choose the type of fund based on your risk appetite. If you are an aggressive investor, then you can choose to invest 100% into equity funds or if you are conservative investor, then you have the option to choose debt funds in your child ULIP plan. You also have the option to switch funds as per your requirements.
Endowment policies are life insurance policies that not only cover the life of the policyholder but also help him/her to regularly save for a long-term duration so that they can get a lump sum payment upon maturity to accomplish long term goals. Therefore, endowment plan can also be classified as a retirement plan and a necessity for ensuring smart financial planning.
This is done so that the lump sum payment can be used to meet huge financial needs like buying a house, paying for higher education, or funding your retirement goals. The main benefits of an endowment policy include having goal based savings, protecting your loved ones financially, tax benefits, and the facility to obtain loans against the policy when faced with a financial emergency. One of the most important features is related to the timing of the purchase of the endowment policy. It is in your initial years of work – when you have a consistent source of income and are in a comfortable position to pay all premiums – that you should invest in an endowment plan. Given this, it would be a smart decision to invest in an endowment life insurance plan in the initial stages of life.
Thus, it is clear that life insurance product can be used as an effective investment tool that can not only give you regular income but also offer financial help to reach important milestones in life. All you need to do is carefully select the right life insurance product based on your retirements and risk appetite that will help you to successfully build an investment portfolio to be proud of.