There are several insurance cum investment plans offered by every insurance company. So should you buy life insurance as a financial investment? Let’s look at the types of such plans.
Types of life insurance cum financial investment
Guaranteed Return Plans
These offer a guaranteed return over time. These are largely for investors who don’t like any risk.
Unit Linked Insurance Plans (ULIP)
These are essentially mutual funds that come with a life insurance cover. You can select what proportion of your investment to put in debt and equity. You get the option to change that a few times in a year.
Capital Guarantee Plans
These are a hybrid between Guaranteed Return Plans and ULIPs. You can get an upside, while your downside is protected.
Annuity or Pension Plans
You invest in these plans during the contribution stage which can be over several years or even one lump sum. Many plans offer you options of how this can be invested (government securities, debt, equity, alternative assets). Then starts the annuity or pension stage, where you get periodic payments under the plan. These periodic payments can be monthly, annually or even increasing. They can be for a fixed period or for your lifetime.
Under all these plans, if you pass away at any stage, your nominee gets the death benefit.
When you read about all this, it looks great. However, we don’t prefer such mixed products. Let’s take a look at the features and see if there’s a real advantage and what are the alternatives.
Features of such plans and the alternatives
Life Insurance
These plans are geared more toward investment. Life Insurance offered by these plans is probably insufficient. You are better off buying a separate plain vanilla term insurance policy for a suitable amount that you actually require. Further, the premiums are likely to be cheaper too.
Returns
All investments are a play between Returns, Safety and Liquidity (ability to quickly convert to cash). If something is high, then something else is low. Guaranteed Returns and Pension plans mostly guarantee you payments (safety) regularly (liquidity), so the return is low. Such returns may not be sufficient to beat inflation. You can get similar or better returns with a mix of PPF (Public Provident Fund) and mutual funds.
Regular Income
Pension plans offer you regular income for or during retirement. If you are looking for a regular receipt after retirement, you can go for an SWP – Systematic Withdrawal Plan of your invested mutual funds (we always suggest going for the “Growth” option when investing in a mutual fund and not the dividend distribution – now called the IDCW option, because of the power of compounding). So it is possible to get regular receipts through other means.
Flexibility
These plans are not really flexible and not liquid (other than the regular payment to you), in the sense that you cannot withdraw your entire investment. Certainly not without some charges. We believe it is better to have access to your entire investment should you need it for an emergency. Mutual funds can meet this requirement.
Tax Deduction on Invested Amount
Under all these plans, the amount invested is available for a deduction up to Rs 1,50,000 under section 80C along with other investments (i.e PF, PPF, life insurance premiums) etc. There is an additional deduction of Rs 50,000 for investment in certain Pension Plans. Now if you’re already contributing to those other things then you don’t get the deduction. In fact we think that you should separately contribute to PF/PPF and get a separate term life insurance policy and better use the deduction for these. If you have selected the new tax regime (ie without deductions) or are planning to shift to it at any stage, then anyway the deduction does not apply. The death benefit is generally not taxed for the nominee. If you survive and get back any amount under the plans, it would mostly be taxable for you.
Tax on Pension Received
The pension paid under these plans is taxable. So no benefit here.
Ease of Understanding
We like simplicity. Hybrid insurance plans are complicated and messy and difficult to understand for most buyers. Even if you manage to understand (or think you do), there are so many options that you may never feel comfortable or satisfied with your selected option.
So the bottom line is…
These plans only work for you, if you are extremely risk averse (even then, there is a risk of the insurance company defaulting) and find it difficult to save regularly. /Rather than such hybrid insurance plans, we suggest a mix of term life insurance policy, mutual funds and PPF. This will offer you matching risk, better returns, more flexibility, higher liquidity and protection.
In order to know how much of each investment suits you along with other financial products, you can build your personalized investment plan with Propel Money here.
