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Combinations of Insurance Plans

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Akhilesh Sharma, a 30-year old IT professional, developed a mix of equities, mutual funds and real estate in his investment portfolio. He realised that he also needs life insurance to make his portfolio complete.

As an informed investor, he was true to an extent but then the question came in: whether life insurance can be treated as an investment?

There is no hard-and-fast answer to this question. For a businessman, it may not be an investment because traditional life insurance policies yield very low returns in the range of 4-6 per cent per annum.

But when it comes to a salaried employee, it can become an investment because of safe returns. Thus, it depends on your risk appetite and objectives as well.

Should you go for term insurance plan?

Experts from the insurance sector are of the view that for professionals who are looking for handsome returns plus insurance cover should rather go for a combination of term insurance plan and other instruments such as mutual funds and Public Provident Fund (PPF).

The later generates returns to the tune of approximately 9 per cent, and you can also claim for tax benefits. Confused?

With reforms in the insurance sector, term insurance plans have become a very cost-effective instrument of getting large insurance coverage.

Let's take an example. If Akhilesh goes for Rs 1-crore life insurance coverage, then he has to spend approx. Rs 12-13,000 a year towards a term insurance plan. But, for the same amount of coverage, he may be required to pay a premium of Rs 20-22,000 towards a traditional life insurance plan.

This differential becomes a relatively large sum of money over a period of time, considering the power of compounding. Now, if he decides to go for a combination and puts the differential in PPF, he will be able to generate better returns.

As an astute investor, you should always look for means which can provide you greater returns and better facilities at the same cost.

What makes inflation critical?

Inflation should always take the centre stage of your financial planning. It acts like an invisible expenditure which can erode your financial resources without any noise.

Sample this: If your monthly household budget is Rs 50,000 at present, it will become Rs 53,000 going at an average inflation rate of 6 per cent. There may be many other factors which can increase your average expenditure. You may come across higher but necessary expenses towards education, marriage, or any such matters.

There are all the possibilities that your income also grows at the same or probably higher pace. Although there are times when the economic and business environment is not favourable.

Thus, it calls for financial prudence to put every penny in the right direction. This will help you in keeping your financial condition vibrant and achieving financial freedom in the long run.

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