Life insurance products are intended to provide protection. They are primarily intended to provide a financial cushion to surviving family members in the event of the death of the breadwinner. Life insurance is therefore a financial tool to help applicants not only maintain the same standard of living, but also achieve financial goals as they arise through different stages of life. Term insurance plans are best suited for obtaining high coverage at low cost. However, there are also savings plans that offer protection as well as an opportunity to save for future life goals.
Before you buy, be sure to perform proper analysis as needed in order to get the most out of life insurance plans. Different life insurance products exist and may not be suitable for all, so make an informed buying decision. Sanjay Tiwari, Strategy Director, Exide Life Insurance, in an exclusive interview with FE Online, talks about the role of insurance plans not only in protection, but also in saving to achieve long-term goals. Extracts:
The interest rate offered by most fixed income investments is low. How can life insurance plans help someone looking to save money for the long term?
Savings instruments such as bank FDs, the public provident fund, and the National Savings Scheme are very popular as most Indians are constantly on the lookout for products that offer fixed returns on their savings.
However, these instruments have drawbacks such as fluctuating interest rates and, in some cases, a tax on returns and a cap on the maximum amount that can be invested. Unlike insurance products, they do not come with life coverage.
Among insurance products, guaranteed savings plans continue to offer fixed returns on savings. In addition, policyholders also have the option of choosing the payment structure according to the evolution of their life goals.
In addition, there are ULIPs which are long term investment products but are linked to the market. Over the years, ULIPs have evolved as a category and now offer a host of flexibilities, including premium payment structure and fund selection. Investors can choose from a range of equity, balanced or debt fund options.
In addition, ULIPs offer individuals the ability to manage their investment by switching from one fund to another (usually at no additional cost) based on your financial goals and life stages. Since these products come with a foreclosure, it encourages customers to stay disciplined with paying premiums and ensures long-term wealth creation. Other categories such as children’s plans and retirement plans encourage clients to save for specific goals such as education / child marriage or retirement planning.
What role do guaranteed insurance plans play in achieving individuals’ long-term goals?
Depending on the nature of an individual’s goals and expected income levels, there are a plethora of insurance products to choose from. Guaranteed life insurance plans are products that offer guaranteed returns on savings, in addition to life coverage to secure the financial future of loved ones.
Returns are not subject to market volatility or changes in interest rates. The element of fixed and guaranteed returns makes them an attractive proposition, especially for people with a low risk appetite who want to earn better returns than other savings instruments. Since these are relatively long-term investment plans, returns can be aligned with various financial needs or goals throughout life. They can also help close the gap in cash flow if the policyholder opts for the regular income payment structure. The lump sum option can help achieve important goals.
A multitude of guaranteed savings products today offer the choice of opting for endorsements such as health or additional temporary coverage to strengthen protection. Although jumpers have a small additional cost, they help fill the gap in overall protection with higher coverage. Given the uncertainty in the aftermath of the pandemic, we are seeing increased interest in guaranteed savings plans, especially from individuals who wish to avoid market volatility.
What internal rate of return (IRR) can you expect when buying a life insurance plan?
It is important to understand that life insurance is not the same as other investment products. Life insurance plans are designed with financial goals and long-term protection in mind. Insurance products not only help individuals prepare for long-term needs, but also provide life coverage that secures the financial future of the insured’s dependents in the event of an unfortunate death.
IRR may not be the best way to look at life insurance products because they are comprehensive plans and don’t just focus on absolute returns. In addition to providing returns, they also help protect the policyholder’s financial goals.
However, there is no standard IRR for businesses and products. It varies from product to product and from insurer to insurer. Factors such as age and payment structure also play a role in determining the IRR.
Given that interest rates are low, why should we lock funds into insurance plans that generally have a longer lifespan?
Guaranteed life insurance products offer fixed returns regardless of changes in interest rates. Even in a low interest rate scenario, life insurance products offer benefits that no other financial product offers, including life coverage, additional endorsements, guaranteed returns, a safety net and benefits. fiscal.
Investing in insurance plans offers tax benefits under section 80C of the Income Tax Act in addition to non-taxable products under section 10 (10) D when due or death.
If a person is looking to save for the long term for a fixed income or lump sum payment, with a very low risk appetite, then insurance plans are the right option. For younger people who want to invest over a 15 to 20 year horizon, insurance plans can help meet a variety of needs, including wealth creation. Additionally, they are a lucrative option for HNIs, especially at a time when interest rates are on a downtrend.