The investment aspect of Life Insurance
The importance of investing in life insurance cannot be stressed enough. Life insurance is designed to offer financial safeguards against death of the policyholder and also works as a good investment plan, which helps you meet several life goals in turn. The life insurance sector in India has been witnessing steady growth as more and more people are waking up to the necessity of investing in life insurance plans. The life insurance industry posted growth of 12% between April 2016 and March 2017 with premium income touching Rs.105.26 billion in this period.
Unit-linked plans are essentially similar to mutual fund products wherein the premium is invested in various funds in keeping with policyholders’ risk appetite. However, the difference in a mutual fund investment is that the money is virtually at call by the customer. In case of unit-linked insurance plans, it is impossible to predict whether the market will be in an upswing on the day of the policyholder’s death or on maturity. The Net Asset Value [NAV] will reflect the underlying value of assets, which in turn is dependent on the movement of the Sensex.
In case of death during the premium paying term or the term of the policy, the sum assured or value of policy fund, whichever is higher, is paid to the beneficiaries. In case of survival up to maturity, the value of the fund is paid out. The returns on that day [maturity or death] on the plan depend upon the performance of the market, be it equity or debt. So if the fund value falls below amount invested on that day, the policyholder will receive a lesser amount. Hence one can see that the risk here is transferred to the policyholder as nothing is guaranteed.
These plans give an option to the investor to choose between three fund options – debt, equity, and balanced. In these products, premiums can be paid quarterly, half yearly or yearly. Out of the premium amounts, deductions will be made towards Initial administrative charges Investment management charges [there will be an extra charge if the policyholder utilizes the switch over (from equity to debt or debt to balance) option] Annual administration charges Risk cover and the balance will be invested in a selected fund [debt or equity or balance].