Should You Use Life Insurance As an Investment?
There are two common forms of life insurance in the industry - term insurance, and unit linked plans, or ULIPs. There is another kind of insurance - which is popularly known as investment based insurance - endowment plan. One of the questions that rise in the minds of the prospective insurer is: "Should you use life insurance as an investment?" In other words, when there is a considerable outlay that is planned towards insurance policy, why should we not get returns out of the investment, along with the insurance cover? That, precisely, is the idea behind an endowment policy, where you could buy life policy and also stand to gain from the benefit perspective.
What is Endowment Policy?
One of the popular attractions associated with investment in insurance is that you would be eligible for regular and accumulated bonuses and would also benefit from survival benefits, at the end of the term of the insurance policy. When you buy life insurance, you would also be eligible for returns at predetermined rates. As far as bonuses are concerned, they tend to get accumulated and get paid to the insured upon maturity of the insurance policy, or to the nominee upon death of the insured. And even if you survive the duration of the life policy, you would get a maturity amount on survival.
The Catch:
It all seems attractive, but for a few aspects that deserve your attention and consideration.
High Annual Premium: When you are eligible for a maturity amount on survival at the end of the duration of your insurance cover, you should naturally expect high annual premiums to be paid.
Unpredictable Bonuses: Even if you could expect regular bonuses that tend to accumulate, there is no way you could know how much bonuses you would get from the insurance policy.
Low Returns: Despite your eligibility for maturity amount on survival, you would find that the returns are below par, when you compare a life policy with a pure investment option.
Scope for Improvement:
Better Interest Rates: You would get the insurance cover and maturity amount along with bonuses. But bonuses do not get paid as and when they are declared. Rather, they get accumulated without accruing any interest on the accumulated amounts. With this insurance policy, you lose out on interest rates.
Higher Returns: This life insurance policy typically invests the investment portion of your outlay in Government bonds. You may have security, but not the high returns that you could otherwise earn.
Smarter Investments: If you are looking at a smarter option, you should instead be parting only with the insurance part of the equation, and invest the other part on an investment option that gives you higher returns. When you compare life policy with other investments, regular investment options would typically give you better returns.
What can you save on?
You could save on premiums. When the investment part of the equation is out, your life insurance policy would give you just that - insurance cover. You could buy life insurance as a standalone entity, as term insurance or as ULIPs, and could invest the other part of your outlay on instruments that give you higher rates of returns. You may not have a maturity amount with such an insurance policy, but you could very well save on premiums that you would have paid otherwise.
So, should you use life insurance as an investment?
It is clear from the discussions that life insurance policy should give you insurance cover, since the benefits that you get in terms of maturity amount with an endowment plan would be compromised on account of the higher premiums paid otherwise. When you compare life insurance with the returns that you get from investment instruments, you would naturally choose to buy life insurance purely for the sake of what it is supposed to provide - insurance cover, and not to serve as an investment option.