How to save and secure: Insurance-based investments

There are insurance policies which offer life protection along with the benefit of investments. Here's a look at popular insurance-based investments.

In India, life insurance is a misunderstood concept. Primarily, life insurance plans are designed to secure and protect the dependents life in case of the death of the breadwinner. However, traditionally life insurance policies have been sold as investment products where the life assured gets the lump sum at the end of the fixed term or periodic returns on specified intervals during the term. The prominence has been more on the investment rather than insurance as these investments offer tax benefits u/s80C. The private players in the life insurance sector in India have not only brought in newer concepts like adding riders to the life insurance policies but they also continue to sell insurance with more prominence on investment features.

Let’s look at popular insurance-based investments:

1. Endowment policy: An endowment policy covers risk for a specified period, at the end of which the sum assured is paid back to the policy-holder, along with the accumulated bonus during the term of the policy. The quantum of bonus is not assured and it is based on the investment outcome of life insurance companies. This is a insurance-cum-investment product. Endowment life insurance pays the sum assured in the policy either at the insured’s death or at a certain age or after a number of years of premium payment.

2. Whole Insurance Policy: A whole life insurance policy is in force as long as the policyholder is alive. As risk is covered for the entire life of the policyholder, such policies are known as whole life policies. A simple whole insurance policy requires the insurer to pay regular premiums throughout his/her lifetime. Whole life insurance plans with limited payment options are also available where the insured is required to pay premiums for a specified period of the term after which premium payments will stop but life cover will continue.

3. Money back Policy: Money back policy provides for periodic payments of partial survival benefits during the term of the policy. They differ from endowment policy, in the sense that in endowment policy survival benefits are not payable and only paid at the end of the endowment period. A chief feature of the money-back policies is that in the event of death at any time within the policy term, the death claim comprises full sum assured without deducting any survival benefit amounts, which may have already been paid as money back components.

4. Unit-Linked Insurance Plans (ULIP): ULIPs are market-linked insurance plans with life cover. The ULIP give more emphasis on investment as a substantial part of the premium goes towards investments in market-linked instruments such as stocks, corporate bonds and government securities. On death, sum assured together market-related returns on the investment are paid – in other words, the death benefit could be more than the sum assured. Generally, the choice of extent of life cover is left to the policy-holder.