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How to choose between life insurance and other investments like mutual funds deposits stocks etc
Hemesh is looking to take an insurance policy that will provide cover for his life and finances for his family in case of some unfortunate event. He is a 30-year-old married man with a young child. Along with insurance he is also considering other investment options like small savings, fixed deposits, mutual funds and even equities. He is not sure how he would like to spread his money across various investment areas including insurance. Making the right investment choice is a bit difficult because Hemesh has to weigh the returns from various investments against the benefits of insurance that could be received.
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Analysis The basic purpose of buying insurance is to ensure protection for the dependants of an individual in case of some unfortunate event. While this is the primary aim, there are also other types of offerings that can be considered. Other than the insurance cover these offerings provide benefits like returns, regular cash flow and so on. Often it becomes necessary to check out the overall position on this front to get a proper idea about investing in insurance.
Hemesh will also have to consider the exact position in several areas before making any decision. There has to be a proper comparison of the various options as this will enable Hemesh to get a proper view of the similar choices and then select the options that best fit his requirement.
When it comes to fixed income instruments there are small savings schemes that give a return of around 8 per cent per annum. This is a fixed rate of return that is known to an investor at the time of investing, so he/she knows precisely the amount he/she will receive upon the maturity of the scheme. More importantly, many options like the fixed deposit ensure a regular payout, acting as a regular source of funds for investors. Similar benefit can be obtained from insurance policies like endowment plans or even guaranteed return schemes that offer a regular return. However, it is unlikely that there will be a monthly or even quarterly payout. Even when there is an insurance policy that earns bonus that is accumulated and then paid at the maturity of the policy. Hemesh can use the various debt options present in the market to meet his regular income needs
Flexibility of investment is the other factor that is present in various investment options. This means that an investor can choose between an equity-oriented mutual fund and a debt-oriented fund. He can invest some amount directly in equities or even in a balanced fund depending upon the requirement. Nowadays, flexibility can be seen in insurance investment too as the introduction of unit-linked policies has provided an exposure to different areas. However when it comes to the actual investment there are slightly lesser amount of variations that are possible because the insurance premium payment is fixed and does not fluctuate as much as that of normal investment areas. Insurance provides a situation where there is adequate protection for a policyholder, which means once a policy is taken it is assured that if the condition occurs then the basic sum assured will be available for the beneficiary. As against this when it comes to a normal investment, the contribution and the growth in that figure determines the amount received, and here a longer time period is the best as there is more time available for the money to grow. Hemesh should first ensure that adequate amount of cover is present to take care of the needs of his family members.
Insurance is mainly a long-term product and hence there is a need to look beyond a few months or years when considering it. For example, a whole life policy is meant to provide funds at the time of death which can be several decades away. Similarly, the real benefit of a unit-linked insurance plan is visible only after 10-12 years of continuing the policy. As against this there are various investments that can be used for different time periods. If you require a 15-day option then you have a choice and similarly you can make use of a 20-year option too in completing your requirement. Thus depending upon his specific requirements Hemesh will be able to complete the process comfortably.
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