As an infant, you may have been tossed in the air by an adult. You may have been thrilled. The joy of touching the sky is infinite. Plus, you feel safe that there is someone to catch you.
You, thus, concentrate on flying high like a carefree bird. And not a single worry about falling to disturb you.
If only money matters were like that…
But hold on! Your money matters can give you the joy and thrill of adventure WITH the safety of protection. If you choose an investment-linked insurance plan, that is.
What are investment-linked insurance plans?
Think of it as a combination of investment and insurance. A part of the money you pay is invested in stocks, bonds and such assets. The remaining part provides you with a life cover. At maturity, you get back the investment portion of the policy. In the case of death, your family gets the sum assured and the fund value. So, what it offers are:
An immediate and uninterrupted cash flow.
Potentially high returns on your money.
Minimal risk thanks to the insurance protection.
A finger on the market’s pulse by investing across different stocks and debt instruments.
But why investment-linked insurance? Why not separate investments and insurance?
Good question! You can separate your investment from your insurance. But that’s not the only way to go about it.
Here’s why you can consider investment-linked insurance:
Nisha, a 30-year-old communications professional, has a two-year-old daughter, Sonia. Nisha wants to create a corpus for Sonia. This can come handy in case something untoward happens to Nisha. She decided to invest Rs 10,000 every month for 5 years in the Aegon Life iInvest Insurance Plan.
Part of the premium of Rs 1.2 lakh, would be used towards a death-protection insurance lasting 10 years. This guaranteed her a sum-assured of Rs 12 lakh. The remaining portion would be invested in a mix of Equity and Debt instruments. If the insurance-linked fund delivered 8% returns, Nisha would get an additional Rs 9.14 lakh.
Investment-linked insurance v/s Mutual Funds
Such investments work quite like a Mutual Fund—you invest your money in the fund, which then invests on your behalf. You then earn a return proportional to your investment.
But if you invest in a Mutual Fund, you are unlikely to get a lump-sum of Rs 12 lakh. Everything you earn is limited to the return the Fund generated. Had Nisha invested Rs 10,000 every month in a Mutual Fund for 5 years, she would have accumulated Rs 10.7 lakh by the end of the 10th year.
Yes, this amount is higher than the Rs 9.14 lakh earned through the insurance. But, do take into account that this Rs 9 lakh is over and above the Rs 12 lakh sum assured.
Moreover, if Nisha passes away during this 10-year period—say in the 4th year, her daughter would have received Rs 12 lakh plus any return generated by the linked investment. With a Mutual Fund, though, Sonia would have only got Rs 5.6 lakh.
What’s your priority?
So, for a person like Nisha, for whom protection was an important priority, an investment-linked insurance plan works. After all, it offers a dual benefit of protection AND wealth-creation. At all points in time, Nisha can rest assured that her daughter will be financially secure even in her absence.
That’s not all. Insurance-linked plans offer a host of other benefits too:
Monetary protection. You save money from the very beginning. Plans like Aegon Life iMaximize Insurance Plan have zero allocation charges. So, all your money goes towards investments. Also, you can claim tax benefits, which saves you more money.
Protection from emergencies. If you need extra cash to meet emergencies, avail loans against your policy. You can also surrender the policy, but there may be a lock-in period. For instance, Aegon Life provides emergency funding after 5 years. You can also withdraw up to 20% from your fund value each year.
Flexible and effective risk management. You are not locked into one fund. In a bullish market, you can top up your investment. And when you see a fund not performing well, you can switch between Equity and Debt instruments. This wouldn’t be taxed as well! With a Mutual Fund, however, you would have had to pay capital gains tax when switched between Equity and Debt Funds.
Get your investment right
There are certain deciding factors that may help you pick the best plan:
Be clear about your risk appetite and buy accordingly.
Decide on the time horizon. Do you need to stay invested for 10 or 15 years? Or can you afford to build your corpus over an even longer time horizon?
Can you afford to put aside the money for annual investments? Would you rather pay a lump-sum, one-time amount? Decide the best payment modality that works for you.
How involved do you want to be? Do you want a pre-defined investment strategy? Do you want to manage the fund on your own? Figure out the portfolio strategy that you are comfortable with.
Focus on the actual investment part. See what funds a plan invests in. Read up on their performance. Track the market and switch when required.