is insurance a good investment tool?

is insurance a good investment tool?

many people find it difficult and risky to invest in debt and equity markets. the fear for a novice investor is always, what if I lose all my savings? which is why investing through a savings insurance plan has become a popular alternative. 

apart from helping you grow your wealth, these plans also provide insurance cover.

but what are savings plans?

in life insurance, there are protection plans (also known as term plans) and savings plans. term plans offer insurance against a policyholder’s death during the premium paying term, so there are no survival benefits.

savings plans, on the other hand, offer the premium paid along with fixed returns and bonuses (if applicable) when the policy matures. 

are there varied options?

there are three types of savings plans — par, non-par and unit-linked insurance (ULIPs). par or participating policies are those where customers get a share of profits as yearly bonuses.

non-par products are those where a policyholder is not entitled to bonuses. here, the funds are primarily invested in government bonds.

ULIPs have exposure to both the equity and debt markets. depending on the policyholder’s risk appetite, there are funds ranging from hybrid (debt plus equity), blue-chip (pure equity stocks) to pure debt funds.

why insurance investments?

insurance premium payments and maturity proceeds are tax exempt compared to instruments like fixed deposits. unlike mutual funds, you don’t need to pay long-term capital gains tax.

people can switch between funds depending on the market performance. so if there is a stock market rally, you can switch to a pure equity fund for some time.

but remember that you need to pay premiums for at least five years to get returns. 

but aren’t ULIPs unsafe?

not anymore. in September 2010, sector regulator Insurance Regulatory and Development Authority of India (IRDAI) cracked down on mis-selling.

IRDAI not only asked insurers to stop selling ulip policies that promised very high returns (read 50% and above) but also raised the minimum lock-in to five years.