Investment Plans are financial products that provide the opportunity to create wealth for future. Life Insurance products are often used as investment instruments. The advantage of investing through a life insurance plan is that it not only allows you to create wealth for future but also offers comprehensive life coverage at the same time.
These plans are essentially of two types, Unit Linked Insurance Plans or ULIPs that provides returns based on market performance, and traditional endowment plans that offer a lump sum or annuity payout at the end of the policy term when the life insurance policy matures. These type of saving scheme or investments offer life coverage and returns but differ in their construct.
A good financial plan with returns and life coverage invest the premium as paid by the policyholder in the stock market and gives them returns which are comparatively volatile as they depend on the performance of the stock markets. Whereas, an endowment plan offers lower but safer returns. However, a customer does not get to know where they are saving money or it is being further used due to the opaque construct of endowment plans, unlike ULIPs where they know where their fund is being put. ULIPs offer customers the option to check the status of their investments through a figure called the Net Asset Value (NAV), among others.
Nonetheless, endowment plans have their benefits. Where ULIPs give the policyholder a lot more flexibility and transparency, endowment plans act as a guaranteed return plan option as they offer definite profits.
Best Investment Plans in India 2018
Types of Investment Plans
- Life Insurance Investment Plans
- Unit Linked Investment Plans (ULIP)
- Endowment Plan
- Guaranteed Return Plan
Life Insurance Investments:
The best investment plan offers the policyholder both life cover plus the added advantage of saving fund. Life insurance investments is always taken keeping a future objective in mind and this objective could be either a long-term or a short-term objective, like buying a house, child's marriage and education or just building up a corpus for future. The best investment acts as a two-in-one solution.
Unit Linked Investment Plans (ULIPs):
Unit Linked Plans as commonly referred to are a type of coverage plan that provides coverage wherein the money paid as premium by the investor is channelised into the stock markets. Each and every ULIP has a different set of funds that they invest in. Individuals who invest in a best investment plan get a certain number of units of the fund. These investments are based on the correlation of the fund value of the fund they are investing in and the premium the investors have put in.
The Unit Linked Insurance Plans are amongst the best investment options in India in case you are looking for some coverage cum investment options. The ULIP plans give both financial security and life coverage. ULIPs also give you the leverage to make direct market investments. Your ULIPs funds can be invested into equity funds or debt funds or both partially. The value of the debt fund or the equity fund is evaluated as Net Asset Value the criteria. Though investment through ULIPs is rarely seen case but Unit Linked plans have a greatly responsible in the investment market.
Comparatively, mutual funds are complete Systematic Investment Products i.e. SIP. Different mutual funds have different risk exposures. Mutual funds that are equity oriented invest a major part into equities wherein the balanced funds or hybrid funds invest into equity and debt fund market. The debt funds invest in the bonds and fixed income securities. Below is a brief on how ULIPs and Mutual Funds justify your investment needs:
The potential returns on ULIPs are lower since the ULIPs fall is a member of low risk products unlike a mutual fund product. The sum assured promised by the product is regardless of the return earned by the ULIP plan. Wherein mutual funds are differently featured as the equity mutual funds incur better returns than the hybrid returns and the hybrid funds give higher returns than the debt funds.
ULIPs can be anytime used for money withdrawal to get through any financial emergency. This totally depends on the investment tenure of the product. Although mutual funds are more liquid as the market exposure is higher than ULIPs.
Since ULIP plans are less prone to risks because the simple ideas of ULIPs are to provide coverage. Although ULIP plans have a variety of scope to invest its funds the ULIPs needs to be handled diligently since they are basically insurance products. The risk associated with equity mutual funds are more than hybrid mutual funds and both are relatively more risky than a debt fund. Although an investor can put in their money after making a detailed study on the product NAV i.e. the Net Asset Value.
Endowment plans are the traditional form of insurance products that offer an individual a life cover with very low profit. Endowment plans are usually taken by individuals who are looking to increase the value of fund plan but one which offers them guaranteed profits in lieu of a higher life cover.
Endowment plans are the best investment plan for investors who are not looking for a large corpus but are actually more concerned about keeping their funds safe and secure, and still receive a certain amount of profits on their assets.
Guaranteed Return Plan:
These plans offer a guaranteed amount of fund to a policyholder at the end of a specific investment policy term. The policyholder needs to compare and know that the guarantee he gets here is specific to set of terms and conditions of the plan. These conditions could be either a:
- Highest NAV, which is usually in Unit Linked Plan
- Capital Guarantee, again offered by Unit Linked Plan
- Maturity Guarantee, offered by traditional endowment plan
Objectives of Investment Plans
- To save we need to look at ULIP with a guaranteed return possibility
- For corpus building, a traditional ULIP with no guarantee
- For a retired person, an annuity plan
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Benefits & Features of Investment Plans
The best investment plans or savings schemes offer more than one benefit to the consumers. Primarily, they offer:
- Protection to loved ones
- Goal based planning
- Build fund reservoir
- Tax Benefit under section 80C and 10(10D).
- Options to obtain a loan in lieu of the same as a guarantee against non-payment
Protection to loved ones:
Return on investments with coverage provides the dual benefit of life cover and returns. This means that in the event of anything unfortunate happening to the insured, their family will receive the sum for which they were insured in addition to the fund value either as a single or in the form of monthly/quarterly/half yearly payments. They help to secure the family needs and monetary goals if the insured party is unable to earn a living or in the unfortunate event of his demise.
Goal based planning:
A goal based saving option is a great way for saving money for a goal - whether it is buying a house or a car, paying for children's education costs, or planning for marriage or after you retire. The endowment funds offer a secure yet safe way to plan for retirement if you are not keen on riskier market linked ULIP plans. The ULIP plans offer alternative opportunities to invest and you can take a look at their historical profits to calculate your returns and corpus build up in a few years time. Also, the lock-in period of a good plan to invest and save that the funds stay untouched and builds up over the years to help you achieve your objectives.
Build fund reservoir:
Plans with coverage cum investments with lock in period help to save money that can be used to fulfill a financial goal. Whether you want to buy your first house in seven years and/or save enough to buy a second home in the next five, your saving plan feature can help accomplish your aims.
The premiums paid under these plans qualify for deduction under section 80C of Tax Act up to applicable limits. This means that you are not taxed on the funds you invest in these options or best saving schemes and additionally the profit is reduced by the investing fund. The exemption, however, is limited to the total exemption limit under section 80C and cannot exceed that statutory limit. In addition, the payout received on maturity is exempted from levies under section 10(10D) of the Act.
Options to obtain a loan in lieu of the same as a guarantee against non-payment: Banking institutions take these plans as collateral for any loans given to the insured. These instruments act as security for the loan. Since the loan is in the form of a secured loan, the interest rate is generally lower and other terms and conditions more favorable as compared to unsecured loans.
Things to Check Before Choosing Investment Plans
Your monetary goals should determine what type of scheme you should buy. These goals may include marriage, buying a house or a car, providing for children's education and marriage or building a corpus amount. In fact, even small term goals like foreign trips can be financed by ULIPs. If you are just starting out in your career or have a small family, then you can definitely opt for a best saving scheme such as a ULIP to fund your short-term goals. On the other hand, if you are in your 40s or even 50s, then endowment plans are better as best saving schemes in combination with ULIPs or other options like mutual fund. Your monetary goals will help determine what options are best.
Current Expenses vs. Savings:
In order to meet the financial goals the amount an investor spends or saves has a larger role to play. With fewer saving and more expenses, it is unlikely that you can define large short-term goals that can be met by coverage plans. In such a scenario, if you live at home with your parents and have no major outgo like rent, and you are likely to save money every month then it is best to buy an adequate life cover with return benefits and get their two-in-one benefit.
Future Expenses vs. Savings:
The amount you save for future will also determine what kind of scheme works as the best for you. If you have fewer expenses now because the children are young, you can plan for the major expenses that will come your way in a few years like the children's college education or marriage. Therefore, you can choose an option that charges premium for a few years and then pays out enough that it can itself pay for any premium from the annuity or other regular benefits. Moreover, you investing a higher amount would now mean that a good profit plan will grow to a larger capital base in 20-30 years time when you need it for your monetary goals or basic expenses. Planning your expenses is a good way to filter the ones to invest on.
Major Expenses that may arise:
These schemes are a smart way to get the cover you need and also grow your fund at the same time through the best saving schemes. The major expenses like buying a house or to meet the living expenses after you retire can be easily covered by ULIPs and even endowments. Also, you can plan for the major expenses that are certain to occur and take them into account while determining the best saving scheme. E.g., suppose your child is in primary school, then you know that within 8-10 years you will have to bear major expenses for their education. As such, it makes sense to invest a small ULIP that ensures you can meet this definite expense in a few years time.
Insurance Cover - Existing vs. Required:
The insurance cover of the best saving scheme should be adequate to take care of you or your family in case you are unable to work anymore or in the unfortunate event of you being no more. The cover provided by the product should be able to pay for your own or your family's expenses in the years to come until your children can take care of you and your spouse in addition to themselves. To understand how much you need, make an estimate of your current and future expenses vis-a-vis what a scheme offers. If your cover is less than what is required, then opting for ULIPs or endowments as best saving schemes are a better way to ensure you increase your money while protecting yourself and your family at the same time.
Number of Dependents:
The number of dependents should also determine the assured sum you need to invest in the best options. If you have only a wife and child as dependents then your needs would be lesser in comparison to when you may be taking care of your siblings, parents, parents-in-law, grandparents, nephews, nieces, etc. Your monetary insurance product should not only be able to cover for all the necessary expenses and also help you build a corpus for all your and your family's major goals. Also, the age of the younger dependents matter while choosing the best saving scheme. If you have teenage children, then it is likely you need a good plan to save up for their college education or marriage. ULIPs are better for such cases than endowment plans.
Fund Planning before Buying an Investment Plan
To understand how much cover a person needs in a best saving scheme, he or she has to take stock of their existing expenses, compute to the extent possible the amount of future obligations that are likely to crop up and how much money they need to meet their living expenses. A key factor is also the age of dependents as this would determine how long before they can meet their own living expenses without having to depend on the payouts from the schemes.
The existing loans that a person has are one of the primary things that one should consider while calculating the amount of life cover required in the best saving scheme. The existing loan may be a house loan or a personal loan, a car loan etc. It may also include loans that a person or his/her dependents may have to take in the future and their EMI payments. E.g., a child may have to take an education loan to cover for further studies or foreign studies. In such cases, an ideal financial portfolio should be adequate to cover for repayment of these loans for 2-3 or more years until the child lands a job and can repay the loan himself or herself.
Replacement of earnings:
This is perhaps the most important aspect of applying for a best saving scheme in the first place. The payment from the best plan on the happening of an unforeseen or unfortunate event must be adequate to cover for the loss of income without any material change in one's lifestyle. Suppose the sole breadwinner has a salary of Rs. 12 lakh per annum, then the plan should be able to cover for a substantial part, if not all of the income loss suffered by the family, if the insured is unable to work due to a partial or total disability or in the unfortunate event of his demise. Saving money also helps to build up a corpus that can yield interest income.
Existing and Future Expenses:
A good product should be enough to cover any major expenses at present or in the near or distant future. So, larger expenses such marriage, retirement, continuing treatment of illnesses, etc. has to be accounted for in the calculations along with saving fund while arriving at the life cover required for the family. The expenses should be thought out with some rationality to select the best saving scheme. Considering medical expenses or hospital stay for the family does not make sense if there is already a Mediclaim plan covering all such expenses. However, the annual premiums on such options should be factored in while making the calculations.
The existing cover should be discounted while calculating the cover required if it is an individual financial scheme. If it is the employer's group policy, then the coverage under it can be considered. For more clarity, it is always better to ask the employer for the benefits under the group financial policy. Once the facts are clear, the individual can reduce the amount they are likely to receive under these policies from the new cover they need under the insurance products.
Income of Spouse or Other Members of Family:
While calculating the coverage required, it makes sense to discount the income of the spouse or other members of the family. This will help provide a more realistic picture of the amount of coverage and returns required. If the spouse earns then the amount of cover should be able to take care of all the major expenses that are likely to occur and also take care of most of the expenses that are being met by the earnings of the insured. The rest of the expenses can be met from the income of the spouse.
To plan your financial future better insurance service providers have developed various tools to aid individuals to calculate premiums and plan better for their future financial aims. A premium calculator helps to make a cost efficient decision and examine different plans that meet the basic requirement of the investors. The calculator helps the investor to use their fund in a more systematic manner in order to have a good portfolio.
Compare Features before Applying for Investment Plans?
There are different options to invest and not necessarily all of them can fulfill the basic objective of an investor to invest. To know more about this, it is always good to compare before you can purchase. When we are comparing we need to look at a few things:
The coverage that is offered is a good indication of which products are better as compared to the others. The better scheme will always offer the most comprehensive and yet practical coverage. Though most of the schemes offer similar options to save, some of them may offer increased cover if the ULIPs reach a certain milestone or may offer the same cover at a lower premium. Also, with the IRDA keeping a strict vigil on the insurance market, most insurance providers now focus on ULIPs as long-term products unlike before when they were mostly sold by unscrupulous agents as short-term options to invest. This means that companies now are more likely to offer better cover than before as the investors are buying the policy for the longer tenure instead of looking at it like a short-term plan.
Add-On Covers and Riders:
A good financial product offers extra covers and riders at significant discounts. These add-on riders may include increased life cover for a smaller premium additions, cover for parents or larger number of family members, health cover, timely health checkups, and so on. These rider addons, though not always a feasible option, may offer the specific cover that a person may be seeking. For Instance, some riders may include personal accident cover, and child cover, among others. All of these are available at a discount as compared to what taking one of them as a single unit plan may come up to in terms of premiums. An investor can opt for the add-on covers or riders that suit their needs.
Flexibility to Change Cover:
Some options allow the insured individual to increase or even decrease their cover during the policy tenure. This is essential as the cover needs vary according to your age and responsibilities. During your early years, the cover can be less but it has to increase as your expenditure and responsibilities grow with age. This is because the investing amount should be able to cover for any loss of income without the need to make any major changes to your lifestyle. A good plan will let you increase or decrease your cover according to your needs.
Though most of premiums of the assured amount are similar, extra fees and charges may affect the benefits on the investing funds. Endowments, as a rule, are costlier than ULIPs due to the guaranteed profits they offer. Some things to look out for include what part of the premium is used for investing. Some ULIPs may load more of their costs during their initial years while others may spread them over a few years. This means that the sum allocated to the ULIP is less in the initial years. This affects the returns as higher the initial investments, the higher the long-term benefits.
Option to Increase or Decrease Premium:
A good plan will offer the option to increase or decrease your premium depending on your payment capabilities. Some may offer top up covers that let you increase your cover on payment of extra premiums. This is a good option to have as you may want to pay a higher premium to gain higher profits when you can and then reduce your premium when you have other responsibilities where you need to put your fund.
In most cases, the profits offered are a good way to understand which option is better. For one thing, there are two types, the market linked ULIPs whose benefits are dependent on the market and may offer higher profits, and the endowment options that offer sure profits but on the lower side. Another point to note is that the profits in endowment choices only come after a few years while in the case of ULIPs, the insured can make complete withdrawals once the lock in period has expired. A good way to understand which plan is better is to understand your requirements. If you prefer sure but safe profits, then endowment options are ideal. Alternatively, if you are comfortable with the higher risk for the higher profit, then the ULIPs are best for your needs.
Type of Payouts:
Different savings options offer different types of returns. For instance, some may offer a single payment while others may offer an annuity while others may offer a bit of both. The choice of returns will depend on a few things - the goal for which the fund is put into the product is being made, the time for which the fund is invested will be made, the type of return desired, etc. In case, the scheme is being chosen for a specific goal such as child's education or a dream house or retirement, then the type of profits desired will vary. For instance, in case of child plans it will be better to receive annuities over a few years that will cover graduate and post-graduate costs whether in India or abroad. For retirement, it is better to receive a single payment near retirement to cover any relocation or other costs and then receive monthly payouts that serve as regularized monthly returns. What option of payouts you choose will depend on your expectations of your needs.
Fund Options Available:
ULIPs invest into funds that are linked to various units - whether trading on the market of otherwise. For instance, some ULIPs may offer near guaranteed profits that are on the lower side as compared to market-linked funds that offer riskier but higher returns. The lower near guaranteed ULIPs invest in non-risky debt securities and savings options and are thus able to protect your capital from market volatility. Most companies offer choice of fund that may sometimes depend on your age bracket. Some may offer a choice of debt and equity market fund with an equal proportion of your funds (50:50) invested in each type of fund units or slightly skewed in favor of debt or equity (say 70:30). Most experts suggest taking a higher exposure to fund market at a younger age and then slowly moving to debt as you age, so that by the time you retire all your money is in debt funds. Such a strategy works better as you are exposed to the market risks at a younger age when you can recover from any downswing, and this risk decreases with age as your responsibilities increase. Moreover, the corpus you have built up remains safe from the vagaries of the market. Consequently, the funds available are an important thing to check before making your choice.
Flexibility to Change:
Insurance companies allow the insured party to change the amount of their funds for investing into the funds of their choice. This is especially good as the of savings increase over the years and investors have the option to considerably grow their asset base. The increase in the investing amount is generally accompanied by a corresponding increase in the life cover, though the increase in the cover may not be proportional as the focus is more on the growth of fund.
Alternative Investment and Insurance Options:
An important thing to check and decide if you should invest in a good financial product. This works well if you already have some sort of cover gives coverage or a term plan. In such cases, investors can use their funds for investing into mutual funds, which even though they may not provide coverage, are likely to offer better returns. However, if you do not have a choice for investing into market and are looking for policies that gives returns and coverage then are the best options for you to put your money into. You can use an endowment schemes as a backup for definite profits and ULIPs for other goals such as a house, car, retirement, foreign travel and child's education, among others.
Insurance Premium Payment Options:
Most funds give you the option to make monthly, quarterly, half yearly or annual payments. In certain instances, the quarterly, half yearly or annual options make sense as the payment outgo may be less since the companies may offer a discount due to the lesser paperwork involved. However, the premium are generally high and as such only makes sense when you have enough funds to pay the premiums due. If you are starting out on your career or do not have the necessary schemes to make a single premium payment, then the monthly payments make better sense. There are products that have the option to change the periodicity of the premium payment for certain policies. You can begin with the monthly or quarterly payment options at the policy inception and then switch to the semi-annual or yearly payments in the later years.
The premiums of these policies are exempted under the Tax Act up to the prescribed limits. This means that when you make any premium payment for the policies you have, you can claim deduction of the amount thus advanced from your total earnings. For instance, suppose you are investing Rs. 50,000 annually in life coverage options from your annual income of Rs. 4 lakh. In this case, while calculating your income tax, you can deduct Rs. 50,000 under section 80C of the Indian Tax Act. Only the remaining amount, Rs. 3.5 lakh will be liable to taxation, provided there are no other exemptions available. The payout from these policies qualifies for exemption under section 10(10D) of the Income Tax Act.
Types of Investment Plans for Children
The planning for children can be further sub-divided into two: the first for the children's education and the second for their marriage. Both education and marriage are major expenses and need proper asset planning. Insurance investment options are ideal for these as they provide the child the necessary covers in addition to helping the parent prepare for the eventual expenses.
Investments Children's Education:
The meet the expenses to educate your child start taking gargantuan proportions after secondary education. From taking tuition classes to studying for competitive exams, all preparations for furthering their education and career prospects are expensive and need a good financial portfolio. In addition, college fees in private colleges and foreign universities are quite exorbitant and will only increase gradually. All these expenses cannot be met out of the monthly salary of the parents and need to be properly planned. These are ideal for such cases as they provide the necessary cover for the child and also help the parent build-up a corpus for major expenses. Some things to check out while choosing a plan for children's educational expenses include:
Whether the payout is lump sum or regular:
Timely payouts are better to pay the tuition and college fees while a single payment is best to meet major expenses that crop up at the beginning of college or a foreign education course. Some offer both options with a single payment when the child reaches a certain age like 18 or 21 years and customary payouts.
Whether the cover insures against children specific problems:
Children have their own set of unique ailments and the better option will cover such contingencies. They will also provide reimbursement for illnesses and diseases that require hospital stays.
Possibility of Increasing or Decreasing Cover:
Since the parents meet most of their children's expenses, it makes sense to go for a good scheme to invest with higher return in the initial years and lesser cover. This will also help to build up a larger corpus in the later years.
Investments for Children's Marriage:
The individuals generally sketch the funds to invest in order to meet the expenses of children's marriage with a good financial option. The best ones are those that give a payout at a certain age of the child such as 23 or 25 years. An early move in to the products that provide coverage when the child is young helps to build a large corpus of premium.
- Options for Retirement Investment Plans
The ideal move for retirement is to begin at a young age, this can help build up a considerable corpus by the time the investor/insured person retires. A good retirement option is one that provides a lump sum payout at the retirement age or just before, to meet the relocation expenses from the place where the person is working to his hometown, and regular payments thereafter that serve as monthly earnings for the individual. The insurance providers offer a range of annuity or periodic payout options that the persons can choose from based on their needs. The schemes chosen should depend on the age of the insured person.
Though equity-linked ULIPs offer the best returns, they are not ideal for people above a certain age due to their higher risk profile. People in their 20s or early 30s can opt for an option to invest with a focus on the equities but those in their 40s or 50s should gradually move away from equities and stick to conservative debt funds. An early move helps to build a significant corpus by the time the person retires. The best strategy is to begin early, have a stock market oriented investment in the 20s and early 30s and gradually move towards a debt-focused portfolio with age.
Some insurance providers provide the option to do this automatically with the person's full awareness while others provide the insured individual to manage the allocation themselves through the plan. Most providers do not allow individuals beyond a certain age to opt for aggressive funds for the investing scheme and instead gives them a perfect blend of growth and capital preservation. Most retirement schemes offer the insured the option to make a single premium payment each year or opt for regularised payments. The choice between the two should depend on the convenience of the insured person, his ability to pay, and the discount provided in the lump sum amount. Insurance providers offer the option to change the periodicity of the premiums depending on the insured's convenience. They also offer additional options to increase the policy amount, change the fund mix or increase the cover through top-ups or otherwise.
Investment Plans - Classifications
The investments can be classified according to the type of schemes they provide, the duration in which the premium needs to be paid and the life stage of the investor/ insured person.
Guaranteed or Non-Guaranteed:
The guaranteed insurance products offer lower but secure profits. These are an ideal if the investor is looking for safeguarding their assets and looking for stable growth of their money. Most of the guaranteed plans invest the insured party's money in secure instruments that are definite to provide the necessary benefits. The non-guarantee insurance products offer better profits but do not promise definite profits as they are market linked. The funds that are put in can range from aggressive funds that invest in equity growth stocks and focus on capital appreciation to conservative funds that invest in debt, money-market instruments or bank deposits and focus on capital preservation.
Single Premium or Regular Premium:
The single premium offers a lower premium as the paperwork and other administrative charges are less. However, from the insured's perspective, these options make sense only if they can afford to pay the cost. Regular premiums are better for younger people who are just began with their careers and do not have much savings.
Life Stage or Non Life Stage:
The life stage and non life stage options allocate assets according to the investor's age. Those in their 20s or 30s are given adequate stock market exposure as they can better manage the risk. For people in their 40s or 50s, the fund allocation shifts to less-riskier stocks and instruments that provide stable and secure profits. The financial options for people in their 40s or 50s focus on gradual asset growth and conservation of the corpus already created.