Life insurance is a basic need. It's the first step in financial planning. However, life insurance is not just for financial protection in the event of untimely death of the breadwinner. It can also be a comprehensive wealth accumulation solution. Whether you are young or old, rich or poor, employed or a business person — you can get a plan tailor-made for you.
In a way, all investments are insurance against financial risk and all insurance is investment for a better tomorrow. Many Life insurance plans have savings component that earn returns just like in any other investments (e.g., fixed deposits, bonds or mutual funds). But the main difference is that Life Insurance really is a long term investment. You must look at Life Insurance beyond 5-10 years to get the right benefits. It also locks up your funds for future needs so that you do not fitter away and miss your long term financial goals.
Life insurance is an investment option that offers specific products tailor-made for different life stages (phases of life). It thus ensures that the benefits offered to you reflect your needs at that particular life stage, and hence ensures that the financial goals of that life stage are met.
Life insurance gives two types of benefits: financial and behavioural. Financially, the first and the most important one is protecting the family against the "cash flow" risk of the untimely death of the bread-winner. This is a real risk most of us underplay. Everything does not go as planned. Life throws up nasty surprises. The only way to some-what reduce the pain of death in the family is to make sure that at least financially the family is secure.
Once this risk is taken care of, you need money for things you wanted to do in your life. Educate children, build a nice home, have peaceful retirement, meet the wedding expenses of your children and so on. To meet these financial goals you need both Money and Planning. This is where the behavioral advantage of life insurance scores over others. Life insurance helps you plan early, save regularly, think long term and protect against downside risks.
When, you save through life insurance, your behavior changes subtly. You become more cautious, caring, systematic and disciplined with your savings. As you pay your premiums regularly, your savings ac-cumulate steadily and locked in for a specific purpose in future. Life Insurance also gives tax breaks on the premiums paid and benefits received.
Amounts payable by life insurance on death are always guaranteed. Amount payable on maturity of the plan are also guaranteed in a traditional endowment plan. In Ulips, the amount invested and the return you get on your savings are not guaranteed but benchmarked to the market returns. Depending on debt or equity or a mix of both you may choose as your fund options your returns may vary between 6-10% on a long term basis. You should note these are indicative and not assured returns. The actual returns depend on market conditions and you may check the benefit illustration for estimated returns.
When you invest for the long term, market volatility evens out and you are likely to receive higher returns than in guaranteed plans. All funds invest in the market only and no one can offer a guarantee higher than what's delivered by the market without running the risk of insolvency. So while providing the guarantee, they go conservative and fix the guarantee at less than the market potential return. When you take inflation into account, an assured rate of return may not give much real return.
If you do proper financial planning, you may put some money in fixed-income securities like bank deposits and bonds and balance in Ulips and mutual funds. A balanced portfolio like this has a greater chance of reducing your overall risk and giving you higher returns to meet your financial goals.
Remember, life insurance acts like a ceiling above your head providing you shelter and protection from any untoward incident. With life having become fast-paced, there are very few things we can hold on to. Our life's pleasures have become momentary now and if we want to enjoy them for a prolonged time, we must ensure that the little necessities of our life are well insured.
