When you hear the word investment, things like mutual funds, stocks, bonds, or real estate might pop into your head. While these are great options to grow wealth over time, one option that often gets overlooked is life insurance. We know that life insurance is undeniably a great safety net to have in case something unfortunate happens, but even beyond this great protection, life insurance can be a powerful investment tool. A life insurance investment can help you accumulate wealth, save taxes, and achieve long-term financial goals.
Understanding Life Insurance
A life insurance policy transfers risk from the policyholder to the insurance company. You have to sign a contract with the insurance company where you agree to pay premiums, and in return, the company agrees to give a lump sum amount to your beneficiaries in case you pass away. This lump sum payment is called the death benefit or sum assured, and it makes sure that the financial stability of your family is protected even in your absence. They’ll be able to maintain their standard of living, pay off debts you may leave behind, and cover daily expenses even when you’re no longer there to provide for them.
A life insurance investment may be only valid for a specific duration. It depends on the type of insurance policy you choose. For example, term life insurance policies provide coverage for a fixed period, such as 10, 20, or 30 years. Once the term expires, the coverage ends but it can be renewed at a higher premium. A pure protection product does not offer maturity after the term expires, but different types of insurance policies combine insurance with investment and offer maturity benefits.
Types of Life Insurance Policies
A life insurance policy doesn’t just provide a payout after the policyholder’s death. Various types of insurance policies offer a range of benefits while the policyholder is still alive. These include investment opportunities, guaranteed returns, tax advantages, and flexibility to help you meet different life goals and needs.
These types of life insurance policies have their own features and benefits and are suited to different individual circumstances.
- Term life insurance – These are the most popular and most common types of life insurance policies. They provide financial coverage for a specific period of time, like 10, 20, or 30 years, and the beneficiaries only get the sum assured if the policyholder passes away during the term of the policy. The premiums are low which makes them very affordable, especially to young people. There is no investment component in term insurance policies, which is why they are also called pure protection plans.
- Whole life insurance – As the name suggests, whole life insurance financially covers your loved ones for the rest of your life. This type of policy is particularly suitable for individuals with dependents such as special needs children or a non-working spouse, who rely heavily on the policyholder’s income and cannot support themselves financially in their absence. These policies have a savings component called cash value which builds up over time and can be used to borrow against. Generally, these policies last for 99 years.
- Universal life insurance – This is also a kind of permanent life insurance like whole life insurance, but the key difference is that universal life insurance policies give policyholders more flexibility in premium payments and the savings component of the policy.
- Variable life insurance – This policy also includes a cash value component which you can invest in assets like mutual funds, stocks, or bonds. Variable life policies tend to have high premiums and come with higher risks compared to other types of life insurance. This makes them suitable for individuals who are comfortable with investment risks and are looking to grow their policy’s cash value.
Also Read: Common Mistakes That People Make When It Comes to Buying Life Insurance
Life Insurance as an Investment
Here are seven reasons why having a life insurance investment is a smart move:
- A life insurance policy acts as a financial safety net for your loved ones. In case of any unfortunate event, life insurance makes sure your family can maintain their lifestyle and don’t fall under the heavy burden of debt. This remains the most important reason why a life insurance policy is a wise investment. If you have many dependent family members such as young children, elderly parents, or a non-working spouse, investment advisor services can help you navigate through the options and choose the right life insurance policy for your needs..
- A Unit Linked Insurance Plan (ULIP) is a type of vehicle that combines investment with insurance. With ULIPs, your premium is divided into two parts. The first provides insurance coverage and the second is used for investing in various mutual funds such as equity, debt, or hybrid funds. You can choose which fund to invest in based on your financial goals and risk tolerance, and you are allowed to freely switch between different investment funds. Upon maturity, you receive the fund value.
- Insurance with a built-in investment component can help you achieve your long-term financial goals by providing a dual benefit of protection and wealth accumulation.
- Policies such as whole life insurance can be used to accumulate cash value over time which can be accessed during your lifetime for various financial needs. You can borrow against the cash value of the policy through policy loans, or withdraw cash from the cash value.
- The government offers many tax benefits for investing in a life insurance policy. Under Section 80C of the Income Tax Act, you can claim a deduction of up to Rs. 1.5 lakh every year for life insurance premiums paid towards policies covering yourself, your spouse, and your children. Also, under Section 10 (10D), the maturity proceeds of life insurance policies are exempt from tax.
- Because you need to pay regular premiums to keep your life insurance policy active, it helps you develop a savings habit that benefits you in the long term. This kind of discipline is essential for financial success.
- Lastly, having an insurance policy gives you peace of mind. Knowing that in case of your premature demise, your family’s financial needs will be taken care of can fill you up with a sense of security.
Also Read: What is the Role of Life Insurance in Financial Planning
Benefits of Life Insurance Investment
- Making a life insurance investment at a young age can help you get lower premiums. This is because when you are young you have fewer health issues and a longer life expectancy. Thus the insurance companies consider younger individuals to be lower risk. You can lock in a policy at a younger age and secure lower premium rates for the entire duration of the policy, which will save you some money in the long run.
- A person can have many financial liabilities such as education loans and home loans. A life insurance policy can make sure your family does not bear the burden of these debts in your absence.
- Some life insurance policies help you generate income after retirement. These retirement plans can help you maintain your standard of living during your golden years.
- Life insurance offers tax deductions of up to Rs. 1.5 lakh under Section 80C of the IT Act. If you add a health-based rider plan with your insurance, you can also enjoy health insurance benefits of up to Rs. 25 thousand under Section 80D.
- Life insurance like ULIPs offers free fund switches to policyholders, which can help you reallocate your investments among different fund options without having to pay any additional charges. This flexibility is unique to ULIPs and enables you to adapt to changing market conditions, risk tolerance, or financial goals over time.
- Annuity plans can help you secure a stress-free retirement.
- Knowing that your family’s financial needs are met in case something unfortunate happens will allow you to rest easy.
- Insurance plans that offer a guaranteed sum assured can protect your money’s value from inflation, market fluctuations, and economic uncertainties.
- You can borrow against your policy’s cash value to finance large and unexpected expenses.
Conclusion
Most individuals still think of a life insurance investment as just a financial safety cushion for their loved ones in case something bad happens. While it does play the risk protection role excellently, it offers far more than just that. A life insurance investment can protect your money’s value, offer tax benefits, help you realise long-term financial dreams, give you peace of mind, and be a source of income in your golden years. There are many different types of insurance available that are suited to different needs and preferences. If you’re looking for pure protection, wealth accumulation, or a combination of both, there’s a life insurance policy that can suit your specific goals.
ULIPs stand out in this regard, as they can very effectively help you achieve your financial goals while also covering your family’s financial future. They allow you to switch freely between different types of mutual funds and also offer significant tax benefits, like tax-free withdrawals and tax deductions on premiums paid.
So don’t wait, invest in a life insurance policy today!
