Can Life Insurance Be Used As An Investment? Types, Pros & Cons

By Okbima 10 Jul 2024
can life insurance be used as an investment

Can Life Insurance Be Used As An Investment? Find how life insurance in India offers dual benefits of protection and investment potential. Learn about term and permanent policies, tax advantages, and various types like Endowment Plans and ULIPs, to make informed financial decisions.

 

Can Life Insurance Be Used As An Investment?

Yes, life insurance can be used as an investment that offers both financial protection and some investment benefits, but it's important to understand the differences between the two main types.

  • Term life insurance: Term Insurance plans are the most affordable option, focusing solely on providing a death benefit for your nominees if you pass away during the policy's term. Term life has no cash value option, so it wouldn't be considered an investment.

  • Permanent life insurance: This type of policy combines life insurance coverage with a savings option. Various types of permanent life insurance, such as whole life and universal life, allow you to accumulate cash value over time. This cash value grows at a predetermined rate and can be accessed through loans or withdrawals.

 

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Pros & Cons Of Using Life Insurance As An Investment

Using life insurance as an investment in India has both advantages and disadvantages. Here's a detailed analysis of the advantages and disadvantages to assist you in making a well-informed choice.

 

Pros

  • Dual Benefit: Life insurance policies often provide both insurance coverage and investment opportunities, offering the dual benefit of protection and savings.

  • Tax Benefits: You can save on taxes by paying life insurance premiums. The Indian Income Tax Act allows a deduction for these payments under Section 80C. Additionally, the maturity proceeds are tax-free under Section 10(10D), subject to certain conditions.

  • Guaranteed Returns: Some life insurance plans, like endowment and money-back policies, offer guaranteed returns along with life cover, which can be attractive to investors.

  • Risk Management: Life insurance provides financial security to the policyholder’s family in case of an unfortunate event, which is a critical aspect of financial planning.

  • Long-term Investment: Life insurance policies have a long tenure. They can help you save money regularly and give you good returns in the long run.

  • Loans Against Policy: Policyholders can take loans against their life insurance policy, providing liquidity in times of need without having to liquidate investments.

 

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Cons

  • Lower Returns: The returns on traditional life insurance policies are generally lower compared to other investment options like mutual funds, stocks, or real estate.

  • High Costs: The premiums for life insurance policies can be high, and a significant portion of the premium in the initial years goes towards administrative costs and agent commissions.

  • Complex Products: Many life insurance products are complex, combining insurance and investment options, which can be confusing and difficult to understand.

  • Limited Flexibility: Life insurance policies have limited flexibility. Premature withdrawal or surrender can cause heavy penalties and loss of benefits.

  • Lock-in Period: Life insurance policies usually have a long lock-in period, making them less suitable for those who might need liquidity or want to change their investment strategy frequently.

  • Opportunity Cost: By investing in life insurance, investors may miss out on higher returns from other investment options, which could grow their wealth faster.

 

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Types Of Life Insurance Policies That Can Be Used As Investments

In India, many types of life insurance policies can be used as investment plans such as Endowment Plans, Unit Linked Insurance Plans (ULIPs), Whole Life Insurance Plans, Child Plans, etc.

1. Endowment Plans

Endowment plans combine life insurance and savings. You pay premiums and get a guaranteed payout when the plan ends, plus a death benefit if you die during the term. It offers steady growth but might give lower returns compared to stocks.

Features:

  • Fixed premiums and a guaranteed sum are assured.

  • Maturity benefits along with bonuses, if any.

  • Suitable for risk-averse investors.

 

2. Unit Linked Insurance Plans (ULIPs)

ULIPs offer both options which is a life insurance and investments plan. Some part of your premium goes to life cover, the rest goes into stocks, bonds, or mutual funds. You choose the investment mix based on your risk tolerance. ULIPs offer growth but have market risks. Be sure you understand the lock-in period and fees before investing.

Features:

  • Part of the premium is used for life cover, while the rest is invested in equity, debt, or balanced funds.

  • Policyholders have the flexibility to switch between funds according to their risk preferences.

  • Transparent charges and the potential for higher returns compared to traditional plans.

 

3. Money-Back Policies

Money-back policies are life insurance with payouts. You get portions of the insured amount back at intervals, plus a lump sum at maturity. They offer life insurance protection and some access to your money during the policy term. Be sure to check the details, as terms vary by company.

Features:

  • Regular payouts (survival benefits) are given at specified intervals.

  • On maturity, the remaining sum is assured & bonuses are paid.

  • Offers liquidity along with insurance coverage.

 

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4. Whole Life Insurance Plans

These policies provide coverage for the entire lifetime of the policyholder, up to 100 years or more.

Features:

  • Fixed premiums throughout the policy term.

  • A combination of life cover and savings.

  • Option to take loans against the policy.

 

5. Child Plans

Child plans help secure your child's future. You pay regular premiums, and when the plan ends, you get a lump sum for their education or other needs. These plans usually include life insurance for you, giving you peace of mind.

Features:

  • Provides funds at important milestones in the child’s life (e.g., education, marriage).

  • Offers life cover to the policyholder, with the child as the nominee.

 

6. Pension Plans (Annuities)

Pension plans (annuities) are like savings you build up over time. You contribute money while working & then receive regular payments after retirement. This guarantees income and financial security throughout your years. Some plans even offer a death benefit for your family.

Features:

  • Accumulation phase where premiums are paid to build the corpus.

  • The distribution phase is where the accumulated corpus is used to provide regular income.

 

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Why Get Life Insurance From Okbima?

Choosing the right life insurance provider is crucial for securing your financial future. Okbima offers many benefits that make it the best choice for life insurance. Here are many reasons why you should get life insurance from Okbima.

  • Many Insurance Products: Okbima offers many life insurance products, including term plans, endowment plans, ULIPs, money-back policies, and pension plans. This allows customers to choose a policy that best fits their financial goals.

  • Competitive Premiums: Okbima provides competitive premium rates, ensuring that customers get the best value for their money. We offer affordable insurance options without compromising on coverage and benefits.

  • Customer-Centric Approach: Okbima is known for its customer-centric approach, offering personalized services and solutions. Our representatives are well-trained to assist customers in selecting the right policy and provide support throughout the policy term.

  • Expert Advice: Okbima’s “Team Of Experts” offers expert advice and assistance in financial planning, helping customers align their insurance policies with their long-term financial goals.

 

Read More:

Who Can Be Nominee In Life Insurance Policy? Types & Factors To Consider

When Should I Get Life Insurance? Benefits, Types & Factors To Consider

When Life Insurance Policy Lapse? Reasons, Effects & Prevention

Why Life Insurance Is Required? Types & Choose The Best Policy

Can You Have More Than One Life Insurance Policy?

FAQs

A portion of your premiums is allocated to a cash value option, which grows tax-deferred. You can borrow against or withdraw from this cash value.

It offers a death benefit to nominees and a savings option with the potential for cash value growth over time.

It depends on individual financial goals and circumstances. Life insurance as an investment may be suitable for those seeking both protection and potential cash accumulation.

Consider your risk tolerance, financial goals, policy terms, fees, and potential tax implications.

Yes, alternatives include traditional investments like stocks, bonds, mutual funds, and retirement accounts, each with different risk and return profiles.

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