Life insurance products are meant to provide protection. They are primarily meant to provide a financial cushion to the surviving family members in the event of the death of the bread earner. Life insurance is, therefore, a financial tool to help nominees not only maintain the same standard of living but also helps them to achieve the financial goals as and when they arise during the various life stages. Term insurance plans suit the most to get high coverage at a low cost. However, there are savings plans as well that provide protection as well as an opportunity to save for future life goals.
Before buying, make sure you do a proper need-based analysis so as to derive the maximum benefit out of life insurance plans. Different life insurance products exist and may not suit all, hence, make an informed buying decision. Sanjay Tiwari, Director-Strategy, Exide Life Insurance, in an exclusive interview with FE Online talks about the role of insurance plans in not only protecting but also for saving to meet long-term goals. Excerpts:
The interest rate offered by most fixed-income investments is low. How can life insurance plans help someone looking to save funds over a long-term period?
Savings instruments such as Bank FDs, Public Provident Fund, and National Savings Scheme are quite popular because most Indians are constantly on the lookout for products that offer fixed returns on their savings.
However, these instruments come with downsides such as fluctuating interest rates and in some cases, taxation on returns and a cap on the maximum amount that can be invested. Unlike insurance products, they don’t have a life cover attached to them.
Among insurance products, guaranteed savings plans continue to offer fixed returns on one’s savings. Additionally, policyholders also get the option to choose the payout structure in line with their evolving life goals.
Additionally, there are ULIPs which are long-term investment products but are market-linked. Over the years, ULIPs have evolved as a category and now offer a host of flexibilities, including premium payment structure and selection of funds. Investors can choose from a range of equity, balanced, or debt fund options.
Further, ULIPs give individuals the option to manage their investment by switching between funds (typically at zero additional cost) based on their financial goals and life stages. Since these products come with a lock-in, it encourages customers to stay disciplined with premium payment and ensures long-term wealth creation. Other categories such as Child and Pension plans propel customers to save towards specific goals such as child’s education/marriage or retirement planning.
What role do guaranteed insurance plans play in meeting the long-term goals of individuals?
Based on the nature of an individual’s goals and expected income levels, there are a host of insurance products they can pick from. Guaranteed life insurance plans are products that offer guaranteed returns on savings, in addition to a life cover to secure the financial future of loved ones.
The returns are not subject to market volatility or changing interest rates. The element of fixed and guaranteed returns makes them an appealing proposition, especially for individuals who have a low-risk appetite and want to get better returns than other savings instruments. Since these are relatively long-term investment plans, the returns can be aligned to various life-stage needs or financial goals. They can also help bridge the gap in cash flows if the policyholder opts for the regular income payout structure. The lump-sum option can help fulfill big-ticket goals.
A host of guaranteed savings products today offer the choice of opting for riders such as health or additional term cover to enhance protection. Though riders come at a small added cost, they help fill the gap in overall protection through higher coverage. Given the uncertainty in the wake of the pandemic, we are seeing an increased interest in guaranteed savings plans, especially by individuals who want to steer clear of market volatility.
What internal rate of return (IRR) can be expected while buying a life insurance plan?
It’s important to understand that life insurance is not the same as other investment products. Life insurance plans are designed by taking long-term financial goals and protection into consideration. Insurance products not only help individuals prepare for long-term needs but also offer a life cover that secures the financial future of the life assured’s dependents in the unfortunate event of 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 returns in absolute terms. In addition to offering returns, they also help protect the financial goals of the policyholder.
However, there is no one standard IRR across companies and products. It varies from product to product and from insurer to insurer. Factors such as age and payout structure also play a role in determining the IRR.
As interest rates are low, why should anyone lock funds in insurance plans which typically have longer tenure?
Guaranteed life insurance products offer fixed returns irrespective of fluctuating interest rates. Even in a low-interest rate scenario, life insurance products offer benefits that no other financial product does — including life cover, additional riders, guaranteed returns, safety net, and tax benefits.
Investing in insurance plans offers tax benefits under Section 80C of the Income Tax Act in addition to tax-free proceeds under Section 10(10)D in case of maturity or death.
If an individual is looking to save for the long-term with a goal of receiving fixed income or a lump sum payout, with a very low-risk appetite, then insurance plans are just the right option. For younger individuals who want to invest with a horizon for 15-20 years, insurance plans can help cater to various needs, including wealth creation. Also, they act as a lucrative option for HNIs, especially at a time when interest rates are on a downward trend.