CRACKING THE INSURANCE DILEMMA
Sandesh Jaiman
CA Finalist
Personal finance enthusiast Building Six sigma finserv
In this article, we are going to discuss about a very common question involving financial planning and that is SHOULD LIFE INSURANCE POLICIES BE SEEN AS GOOD INVESTMENTS?
Well the answer to this question depends on various factors to be pondered upon, which includes taxation, returns, expenses, premiums and so on.
Majorly, we are going to compare that should an investor go for a one shot Endowment policy or he should bifurcate his investments into combination of Term Insurance and Mutual funds.
First of all, let us understand the meaning of all of the above terms:
- An Endowment policyis an insurance policy that provides life coverage, but that pays a sum of money if the policyholder is still alive after an agreed period of time.
- Term insurance is a type of life insurance policy that provides coverage for a certain period of time. If the insured dies during the time period specified in a term policy and the policy is active, then a death benefit will be paid. It does not provide maturity benefit to the policyholders.
- A Mutual fund is a pool of money managed by a professional Fund Manager. It is a trust that collects money from a number of investors who share a common investment objective and invests the same in equities, bonds, money market instruments and/or other securities. And the income / gains generated from this collective investment is distributed proportionately amongst the investors after deducting applicable expenses and levies, by calculating a scheme’s “Net Asset Value” or NAV. Simply put, the money pooled in by a large number of investors is what makes up a Mutual Fund.
So after having a basic idea about the terms, let us now compare them as investments and understand how we can extract the best out of them.
| BASIS | ENDOWMENT POLICY | TERM INSURANCE+MUTUAL FUND |
| MATURITY VALUE | It has a maturity value and helps you grow your money along with that it covers your life risk. | Term insurance does not have a maturity value. It only covers your life risk. But simultaneous investment in Mutual fund will help you grow your money. |
| RETURNS | Guaranteed return plans offer returns up to 6.5-7%. | Term insurance does not provide any return. There is no guarantee of returns in equity mutual funds, but in India we have seen that average equity mutual fund may provide returns of 12%. However, debt mutual funds may provide fixed returns of as good as 8%. |
| Tax deduction on investments | Deduction u/s 80C of Income Tax Act is applicable in case of investments in Endowment Policies. | Deduction u/s 80C of Income Tax Act is applicable in case of investments in Term insurances and ELSS Mutual funds. |
| Tax on maturity | Maturity is tax free. | Maturity of Mutual Funds is taxable under the Income Tax Act. |
| Premiums | Comparatively expensive premium than Term insurance. | Premiums are lower for term insurance as compared to Endowment policies and in case of Mutual Funds there is no premium, you have to invest the amount on lump sum basis or SIP basis. |
The above comparison has been made on the data as provided on the internet. To conclude, an investor should take his decision based on all of the above factors and consult his financial advisor that which product will be best suited for him.