Most people who build investment portfolios for their financial objectives concentrate on stocks alongside bonds, real estate, and mutual funds. Many overlook how life insurance with savings features is an important tool for portfolio diversification. These policies offer financial protection, and along with this functionality, they allow investors to generate growth through wealth accumulation.
This article explains why a life insurance policy plays a vital role in diversifying your investment portfolios and why you should consider it.
Understanding Life Insurance Policies
Before integrating life insurance into your investment plans, you must understand various insurance policies. Endowment and unit-linked insurance plans (ULIPs) are two popular insurance plans that incorporate investments.
Endowment Plans
Endowment plans offer combined risk cover and savings. You pay regular premiums, and in return, the policy provides a lump sum payout either at the end of the policy term or, in an unfortunate event, offering your family much-needed financial support. The savings component, however, builds up, giving you a return that can help meet your financial goals.
Unit-Linked Insurance Plans (ULIPs)
Unit-linked insurance plans are market-driven, allowing you to invest under the life insurance umbrella in different market-linked instruments, i.e., stocks, bonds, and mutual funds. They typically divide the premium into two parts: one goes toward life insurance coverage while the rest is invested in chosen funds. Their return is much higher, though the risk is higher as the investment lies in the stock market.
Providing Financial Security for Your Loved Ones
Diversification is key to any investment process, and equally important is financial security. Life insurance offers a critical cushion to your family in case of your premature death. The death benefit ensures that your family’s financial concerns, daily expenses, existing dues like mortgages, and future educational goals are addressed.
Hence, this protection will allow your family to continue to live without the financial burdens in the event of your passing. Life insurance policies provide long-term protection against risk, giving you the peace that your loved ones are financially safe while your investments earn.
Wealth Accumulation Over Time
Another benefit of life insurance policies is wealth accumulation in the long run. As an investor, you are familiar with the power of compound interest and how it can grow your money when you start investing early and stay invested over time. Particularly in the case of endowment plans, life insurance may provide stable growth and help build wealth over time. These policies have a built-in savings element that grows at a set rate, giving you a reliable means to meet your financial goals.
With ULIPs, however, the performance of the underlying investment funds will determine growth. This would allow you to receive huge returns at a bigger risk. Such long-term wealth accumulation can complement your portfolio’s more volatile assets, helping stabilise overall returns.
Tax Benefits
As an investor, you will always seek ways to minimise tax outflows. The tax advantages provided under Section 80C of the Income Tax Act are one benefit of life insurance policies in India. The premiums paid on life insurance policies get a tax deduction, allowing you to reduce your overall taxable income and set money aside for the future.
Further, the maturity benefits paid out from a life insurance policy, typically an endowment plan, are largely exempt from tax under Section 10(10D) of the Income Tax Act, provided the premiums are not excessive. The same tax benefit applies to ULIPs, thus making them a tax-advantageous way to diversify your portfolio.
Conclusion
One of the most critical aspects of creating an investment portfolio is ensuring diversity in different classes of assets, which guarantees diversification and thus minimises risks. Life insurance policies with an investment component, such as endowment plans and ULIPs, should be considered a valuable part of your portfolio. These policies provide security for life coverage, create wealth, and provide tax benefits for financial security for the loved one.
As you incorporate life insurance into your investment strategy, you can leverage unique benefits for a balanced, diversified portfolio. If you haven’t considered life insurance as part of your investment plan yet, now is the time to realise how these policies can help you achieve your long-term financial goals while securing your family’s future.
