Individuals often tend to confuse insurance and an investment option. Also, most people find life insurance products attractive only when they are offered with some kind of return.
As a result, they often end up settling for an investment-cum-insurance product. However, such a product is known to offer no adequate life insurance protection or provide the best investment option.
Also, experts are of the opinion that for most investment-cum-insurance products an individual often has to dole out high fees and commissions. Moreover, such products offer limited investment options and lack transparency as well.
It is, therefore, in the larger interest of the retail investors to draw a line between investment and insurance needs.
So, in order to address investment needs, mutual funds remain an ideal option. Similarly, instead of putting the money in an investment-cum-insurance product, retail investors should opt for a pure-term insurance plan to address their financial protection needs.
The sole purpose of an insurance scheme is to minimise the financial loss in case of any unfortunate event. In the eventuality of life insurance replacing the earning capacity of a person in case of death, disability, or life-threatening illnesses, looking at it as an investment tool may not work in the best interest of an individual or their finances in the long run.
So, opting for a pure-term plan as a financial protection tool provides an individual with the highest life coverage all at the lowest cost. It is important to note that the premium paid for the term plan essentially has the cost of covering life with no investment component.
Due to these factors, term insurance provides a person with a higher insurance amount at a reasonable premium as the insurance amount is payable in the case of death only. For an investment-cum-insurance plan, the life insurance cover comes through the payment of a higher premium. That is less than a part of the premium, which is meant for the investment as well.
So, once the financial protection needs are suitably addressed through a term insurance plan, an individual can look at mutual funds as pure investment products.
Mutual funds are ideal for addressing pure investment needs and gaining respectable returns. Also, mutual funds help an individual invest in equities at a lower risk. They also provide greater flexibility in managing investments as well as offer a high level of diversification. Moreover, mutual funds are ideal investment products to address any of financial goals.
Due to the lesser cost for management and administration, mutual funds are an affordable investment tool, too. There are no other hidden charges other than the expense ratio.
Mutual funds also offer higher transparency as any information related to a fund’s portfolio, performance or fees can be easily accessed from the website of a fund house. Mutual funds offer liquidity as well, which means fund units can be bought and sold at any time.
Finally, life insurance is a must-have product, which should be just to offset the financial losses due to the death of an earning member of a family. In this regard, a term-insurance plan extends the highest insurance coverage at the lowest possible cost. On the other hand, the focus of an investment is to provide an individual with the best risk-adjusted returns and that is what makes mutual funds the ideal option.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.