Life Insurance: Investment or Not

Life Insurance: Investment or Not

Life Insurance is a contract between the Insured and the Life Insurance Company. In Exchange of some Premium, the company agrees to pay a lump-sum amount to the Nominee of the Insured if the Insured Person dies in the specified period under the Policy Term.

Life Insurance Plans can be sub-divided into various categories:

Term Plan Or Pure Protection Plans 

Here the Nominee gets the Death Sum Assured in the event of happening of unfortunate (death) to the Insured Person. NO MATURITY BENEFIT ACCRUES if the Insured Person does not dies during the specified period under the Policy.

Money Back Plans

These are the Plans where a sum of amount is returned (after deducting some charges) to the Insured Person if he does not die within the time specified in the Policy Term.

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Components of Premium in LIPs.

Endowment Plans

These Plans offer more attractive features like Guaranteed Bonus, Loyalty Additions, Non Guaranteed Additions. Here the Maturity Value of Policy typically equals to Premium Paid during the Policy Term PLUS 4 to 8 percent Interest Annually, depending upon the Policy Conditions.

Unit Linked Insurance Plan

Here a part of Premium paid is invested at the Stock Market/Government Bonds and other financial instruments as the case may be agreed upon by the Proposer in the Policy, to yield better Returns.

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Various Charges in ULIPs.

Other Plans offered by Life Insurance Companies like Retirement Plans, Health Plans and Children Plans are structured using various features of one or more Policies discussed above.

Life Insurance should not be considered as Investment because

  • Low Returns
  • High Surrender Value

It should be considered as a tool to safeguard other elements of Financial Planning. Say, Mr X has bought a House for which he has taken a loan of Rs. 50 Lakhs from a bank for 20 years. Now Mr X secures this loan by taking a Pure Protection Plan for him of Rs. 50 Lakhs for 20 years. Here Mr X is hedging his position, if during the term of twenty years Mr X dies, his family need not to pay for the Loan. Insurance Company would do that.

At last, It can be concluded that Insurance cannot be taken as an investment. But if you wanted to build an estate for your heir, it is an essential Part of Financial Planning.

Be Wise & Keep Investing

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