Investment plans, as far as a lay person is concerned are life insurance plans which provide an insured individual, life insurance coverage while simultaneously providing return on investment for the premium invested. An investment plan thus becomes a financial instrument for the individual to create a corpus for different stages in the future for him/herself and their family. In India, Life Insurance products are often used as investment instruments and while they are used to create and enhance wealth for future requirements, it also offers comprehensive life coverage. The insured has to build a corpus for the future which
include children’s education and subsequently marriage, major investments like a new home/holiday and finally a retirement fund. Thus investments would typically have two investment horizons, short term and long term and what better way to build this investment than with the help of life insurance plans which provide a relatively stable return as well as a simultaneous life insurance coverage.
Investment plans are broadly of two types, Traditional Endowment plans which provide a one time lumpsum payment at the end of the policy period on maturity and the more tempting Unit Linked Insurance Plans or ULIPs that provide returns based on specific fund performance and the investments in stock and other government securities. As far as both these investment instruments are concerned, the Endowment plans are safer in terms of security of investment but lower in terms of yield (return). ULIP’s on the other hand invest premium paid by policyholder in the market instruments hence the returns are relatively much higher but a lot more riskier than the endowment policies. These returns are known to be volatile as they directly depend on the performance of the stock markets, which can many a time be choppy resulting in a mixed bag of returns for the insured policy holder. The Endowment plans offer a guaranteed return to the policyholder, which individuals with a less risky appetite will prefer. Another important differentiator for these two types of investment are the transparency when it comes to investments. In ULIP’s the funds/securities in which the investment are being made are transparently shared with the policyholder and so they are aware of the risks associated with their investment. In an Endowment plan however, the investment avenues are not shared with the policyholder most of the time and this could result in mixed returns depending on the investment portfolio.
There are some key elements to be considered while choosing an ideal investment plan. They are:
ULIP vs Endowment (Risk vs Return)
The first aspect to keep in mind is the policyholder’s risk appetite. A more conservative and older investor, may opt to go in for an Endowment Plan where the returns are pretty much guaranteed upfront, but this however will yield a relatively lesser return. The though process could be is that this investor is keep to ensure they get their investment back at a known % return without too much stress and variables involved. Whereas a younger and more maverick investor may choose to opt for the ULIP route to ensure better returns, but at a slightly higher risk.
Financial Goals (Milestones)
The financial goals of the investor at specific timelines in his/her future life should determine what type of scheme they should invest in. These goals including others may be buying a larger home, saving for children’s higher education costs(mostly abroad), or planning for the children’s marriage or for a retirement corpus and depending on the amount of money required at these stages, investment plans could be opted for and invested in.
Age / Financial Commitments of Investor
Another important factor for the investor to take into consideration is his/her age and financial commitments…a younger person with young children may not have to make too many financial commitments for education/marriage etc and hence can afford to make larger commitments for investments as well may look at investing in plans with higher returns. Hence the age at which the policyholder is making this investment is critical in the decision process.
Expenses vs Savings
Current and Future expenses being incurred by the policyholder on a periodic basis is also a factor that is vital in deciding the investment plan that an individual may opt for. For example, if the investor has regular financial commitments like mortgage (home loans), car loans or other personal loans, these are long term in nature and hence the future expenses are likely to be not very different from the current expense level. Also if they have a propensity for travelling on vacations / eating out regularly / wearing expense clothes, these expenses are not likely to reduce or go away and hence the ability for savings is reduced, there by reducing the capacity to invest in significant proportions in these plans.
Replacement of Income
It is extremely important that the sum assured covering the plan and getting paid at the maturity or the unfortunate demise of the investor be sufficient to cover for the loss of income of the bread winner without any change in the family’s lifestyle. There is also the possibility that following an accident, the investor could be disabled and in this case as well this sum assured should cover family expenses. Saving money also helps the family build up a corpus that can yield interest income which can contribute towards expenses.
Corpus for Unexpected Emergencies
Creating a corpus for unexpected emergencies is also an important part in financial planning for any individual. While one has planned and invested for known expenses like education, marriage, retirement etc, there could be other unexpected emergencies like a major illness to the bread winner in a family or another member for which the health insurance cover was insufficient. There could also be any natural calamity/Act of God peril that is unplanned for…this corpus becomes useful at these moments, but the investor has to make provisions for this corpus apart from other regular investments.
Existing Insurance Coverage
As we have mentioned before, all investment plans also have a life insurance component in them and this is an important part of all investment plans. Prior to investing in any of these plans, it will be useful for the individual to take stock of their existing insurance coverage and then decide which plan to invest in given the additional insurance coverage that will be available under the said plan. The higher the existing insurance cover, the lesser the insurance coverage needs to be in the investment plan to be purchased. It is important that the cover provided by the new plan along with the existing coverage should be able to pay for him/her or his/her family’s expenses in the years to come in case of the demise or disability of the investor.
Family Size and Other Income
The number of dependents that the primary family has also determines the sum assured the investor needs to invest in. If the investor has a wife and only a single child as dependents then his/her needs would be relatively lower when compared to when s/he may have 2-3 dependent children or brothers/sisters, parents, parents-in-law etc. The current age of the children also should be considered while choosing the ideal plan. Another factor to keep in mind is if the spouse/children are employed and earning a salary. If yes, then the family is not completely dependent on the primary insured and hence the investments can be made accordingly.
Most of the investment plans also provide riders like Critical Illness, Accidental Death or Disability, Waiver of Premium, Term or Hospital Cash Rider. The investor should consider taking these riders along with the basic policy to ensure comprehensive coverage under the Investment plan, should something happen at a later date.
There are many objectives the individual seeks to achieve when investing in an investment plan. Some of the key objectives ought to be achieved are:
It is strongly felt that this is an objective that everyone would strive to achieve through their investments. Firstly budgeting the excess amount (apart from routine expenses) that one can invest without hampering their standard of living is a critical step while investing. The insured should set aside a reasonable corpus for this purpose and this enables a more disciplined approach to handling their own money.
Making Ones Money to Work for them
Another key element of Investment Plans is to ensure that the policyholder’s money is not just left idling around in the bank earning a savings bank interest, but is actually made to work harder and earn much more than bank interest. This is an important objective achieved my Investment plans, where the same amount of money, invested prudently into investment plans, ensures a higher return without necessarily increasing the risk significantly.
Security of Investments
Every policyholder seeks a secure investment while putting their hard earned money into one of the proposed investment plans. Today’s market provides a plethora of investment plans across multiple insurance companies that allow the investor to make informed decisions regarding investing their savings. Most insurance companies also have investment advisors who keep the investors abreast of all plans including their features/benefits etc. Most investors should be aware that investment plans guaranteeing higher returns could mean that the investment philosophy could be more riskier. So the investor should make a judicious decision between returns and risk.
A defined milestone based investment plan is an ideal way for setting aside money to achieve a specific goal – whether it is buying a larger home, saving for children’s higher education costs(mostly abroad), or planning for the children’s marriage or for a retirement corpus. Both endowment funds and ULIP’s help achieve this goal of the individual in different ways, but the objective is still the same…understand the milestone, how much money is needed at that stage and plan today on how to achieve that requirement.
Building a Contingency Fund:
Another key objective could be to build a contingency fund/corpus at a defined age/in a defined time period for any unexpected emergency that could arise for the policyholder or their family at any given point of time. There is no defined milestone/goal for this fund, but just an amount of money to be set aside for a rainy day.
Life Protection for Policyholder/Family:
Perhaps one of the most understated objectives of Investment Plans if the Life Protection provided to the insured/investor and indirectly their family. This means that if anything unfortunate and unforeseen happens to the insured, his/her family will receive the sum for which they were insured (Sum Assured) along with the fund value (Fund Value) either as a single payment or in the form of instalments, be it monthly/quarterly/half yearly payments. These payouts help to secure the family needs and monetary goals if the insured party is unable to earn a living or in the unfortunate event of his demise.
The premiums paid under these investment plans qualify for deduction under section 80C of the Income Tax Act, 1961 up to applicable limits. This means that the policyholder is not taxed on the funds invested upto the exemption limit under section 80C and cannot exceed that statutory limit. In addition, the pay-out received on maturity is exempted from taxes under section 10(10D) of the IT Act.
In the India market today, there are several insurance companies that provide plans with comprehensive coverage, good returns on investment and life insurance coverage all rolled into one. Given the fact that there are so many good plans available, it is essential for the investor/insured to compare the available plans and then choose the ideal one suited for their requirements. With the increasing use of technology, such comparison sites are available online that allow you to relax at home/office and choose the best plan.
Selecting the best investment plan is an important decision since there are no investment plans which is completely secure. There is always be an element of risk which is associated with each plan. There will also be different covers, add ons, inclusions and exclusions that the insured should go through before settling on the ideal plan. Risk and Returns always work in tandem, with better returns on the plans with a higher element of risk. It is also wrong to assume that all plans with better returns are much riskier than the ones with less returns. IT could be that the insurance company has managed their portfolio better to be able to provide higher returns without significantly increasing the risk.
When we are comparing we need to look at a few things: