life insurance an investment alternative

Published on May 2016 | Categories: Documents | Downloads: 48 | Comments: 0 | Views: 300
of 63
Download PDF   Embed   Report

it is an investment alternative

Comments

Content

Life Insurance: A Type of Investment Alternative

EXECUTIVE SUMMARY
Money Investment is 10% inspiration and 90% perspiration
The project includes what are life insurance and its various benefits available to
policy holders. In short the project conveys that buying a life insurance is an
investment and the benefits obtained in these investments are not comparable
with those of others.
 Life is uncertain and it is not possible to predict the different events that
can occur. However, there is always a need to earn income to support
yourself and your dependents.
 Financial planning is required to understand the impact of different events
on our lives and on the quality of life for our families. It is like scenario
building and understanding what financial requirements we would have at
various stages in our lives and hence trying to reduce the financial risks
that we are exposed to by proactively taking steps to guard against at least
some of these risks. These could include buying insurance cover,
investing in mutual funds, fixed deposits or government bond etc
 A good investment is one which earns a decent return after providing for
taxes and inflation. The three critical factors effecting investment
decisions are safety, liquidity and expected rate of return.
 Just as buying life insurance is a necessity and more important to buy it
early. With proper financial planning one can work out as to how much
money an individual is entitled to get after the end of a particular term.
So if you start saving early, you accumulate more even with lesser
investment.
1

Life Insurance: A Type of Investment Alternative

 Life insurance and related annuity products are frequently used to provide
the funding for retirement plans and other types of plans. Planning for
retirement is an important exercise for any individual. A retirement plan
from a life insurance company helps an individual insure his life for a
specific sum assured. At the same time, it helps him in accumulating a
corpus, which he receives at the time of retirement.
 Life insurance is bought for several reasons. Tax benefits, of course, are a
key driver for taking life insurance.
 The saving component of life insurance pits the insurer in direct
competition with other financial institution and saving instruments, such
as bank deposit, equities and mutual fund.
 Insurance may not be most beneficial to invest your hard earned money,
but there are sufficient reasons for one to believe that it can be a highly
lucrative avenue to facilitate savings.
 Life Insurance Policy can be a valuable asset, both as an investment as
well as indirect future benefits accrued.

OBJECTIVE OF THE PROJECT

2

Life Insurance: A Type of Investment Alternative

 The objective of the project is to find out whether Life Insurance can be
considered as an investment alternative by the common people or not.
 The main reason behind preparing this project is to make people aware that
life insurance is one of the most important investment avenues and it
provides number of benefits to the insured person.
 The objective of doing this project is to understand how investments will be
beneficial for future.

SCOPE OF THE PROJECT
The project gives brief description about the following.
1. What is life insurance?
2. What is investment?
3. Different types of Investment Avenues
4. Life insurance policies and plans
5. Life insurance versus other investment avenues
6. Benefits of life insurance

RESEARCH METHODOLOGY
Data for the project is obtained in two ways primary source and
secondary source.

PRIMARY SOURCE:-

3

Life Insurance: A Type of Investment Alternative

The researcher collected primary data by preparing questionnaire and
interviewed people.

SECONDARY SOURCE:Secondary data for the project has been gathered from various sites on internet.

INTRODUCTION

4

Life Insurance: A Type of Investment Alternative

WHAT IS LIFE INSURANCE?
Insurance is defined as a co-operative device to spread the loss caused by a
particular risk over a number of people who are exposed to it and who agree to
ensure themselves against that risk. There are different kinds of insurance:




Marine Insurance
Fire Insurance
Life Insurance
Miscellaneous Insurance

Life insurance is a policy that you can enter with your insurance company,
which promises a certain amount to your beneficiary in the event of your death,
in exchange for your premium payments.
Human beings lives are insured under life insurance. A life insurance is a
combination of savings as well as security element. The insured is assured that
the insurance company will pay his family the insured amount in case of his
premature death. If he is alive and the policy matures for payment, the saving so
made will be helpful in his old age.
It also involves insuring the life to safeguard ones future as well as to make
future family needs secured even in case of death of earning members.

5

Life Insurance: A Type of Investment Alternative

Life insurance involves an element of investment which already leads to
compulsory saving and income returns in future.
Life insurance today plays a major role in one’s life at various stages. It is a
contract that pledges payment of an amount to the person assured (or his
nominee) on the happening of the event insured against.
Buying insurance is extremely useful if you are the principal earning member
in the family. In case of your unfortunate premature demise, your family can
remain financially secure because of the life insurance policy that you have
purchased.
Different people buy insurance for a variety of reasons. Insurance should be
brought for the sake of insurance only. While buying insurance it is to be
remembered that a part of the premium that is paid goes towards risk coverage.
The return from insurance can never be more than one can get from some of the
other options. At, the same time other options do not offer insurance. They are
purely investments.

SOME IMPORTANT ASPECTS OF LIFE INSURANCE

1. Life insurance is not only the best possible way for family protection.
There is no other way.
6

Life Insurance: A Type of Investment Alternative

2. Insurance is the only way to safeguard against the unpredictable risks of
the future. It is unavoidable.
3. The terms of life are hard but the terms of insurance are easy.
4. The value of life is far greater than the value of property. Only insurance
can preserve it.
5. Life insurance is not surpassed by many other savings or investment
instrument, in terms of security, marketability, stability of value or
liquidity.
6. Life insurance enhances the existing standards of living.
7. Life insurance perpetuates life, liberty and the pursuit of happiness.
8. Life insurance is a way of life.

WHAT IS INVESTMENT?

7

Life Insurance: A Type of Investment Alternative

The concept of investment has many meaning. Investment is the
employment of funds with the aim of getting return on it. It is the commitment
of funds which have been saved from current consumption with the hope that
some benefits will receive in future. Thus, it is reward for getting money.
In other words an investment is a sacrifice of current money or other resources
for future benefits. Investment is generally made to earn profits, for capital
appreciation, for higher returns for the purpose of keeping the money safe, and
to secure your future. Every investor has to find out one or more avenues of
investment and act accordingly.
Financial planning makes this possible. Financial planning attempts to
maximize returns keeping in mind the liquidity and security of investment.
Three basic principles of financial planning are as under:
 Setting realistic goals
 Starting investment early
 Thinking long term, while allowing for short term needs that may arise
Factor effecting investment decisions:The three critical factors effecting investment decisions are:

 SAFETY:
Safety refers to financial soundness of the investment. Whether the
principal and returns on investment are received back.

 LIQUIDITY:
Liquidity refers to the quickness with which the assets can be converted
to cash whenever it is required. E.g. saving account in bank is highly
liquid while investment in bank is less liquid. It may be noted that it is
important to consider the penalties that apply when an investment is
8

Life Insurance: A Type of Investment Alternative

turned into cash. Many investments can readily be turned into cash, but
the cost when it is done can be significant.

 EXPECTED RATE OF RETURN:
This is the amount of money that an investment earns.
Besides the above three factors we must also consider two additional factors
which affect overall return. These are the factors of taxation and inflation.
Inflation can be defined as a rise in the average level of prices of goods and
services.
A good investment is that which earns a decent after providing for taxes and
inflation.
Your economic well-being in long run depends significantly on how wisely or
foolish you invest. It is for the investor to select the best avenues for safe and
profitable investment of their surplus funds.
Some investment avenues provide maximum safety but low return while some
other offer attractive returns but limited safety. Some more investment avenues
offer tax benefit.

9

Life Insurance: A Type of Investment Alternative

DIFFERENT TYPES OF
INVESTMENT AVENUES

10

Life Insurance: A Type of Investment Alternative

Wide varieties of investment avenues are now available in India. An
investor can himself select the best avenues after studying the merits and
demerits of different avenues. Even financial advertising, newspaper
supplement on financial matters and investment journals offer guidance to
investors in the selection of suitable investment avenues.
Today’s investor is faced with an overwhelming number of choices when
it comes to implementing an investment strategy. Since the right combination of
investments in the right types of accounts can mean reaching your goals sooner
rather than later, it is important to know your alternatives.

There are various avenues for investing of our hard-earned money. Each
avenue may yield different rate of return. While understanding these avenues
and evaluating the rate of return, we must always keep in mind that there is
relationship between the expected return on an investment and the risk that this
return is not achieved (which may include loss of the original investment).
Greater the risk, higher is the expected return.
For example, investments in shares may yield a higher return because
there is a risk of the amount invested being wiped out. However debt
instruments yield only a fixed lower yield but return of capital and interest are
safer.
Each one of us can study the advantages and disadvantages of each
investment-opportunity and take decision accordingly.

11

Life Insurance: A Type of Investment Alternative

Following are the various avenues of investment available:-

12

Life Insurance: A Type of Investment Alternative

B an
k
D ep
o s its
M on ey
M arket
I n s tr u m e
n ts
Pr
eci
ou
s

PP
F
&
EP
F

L IF E
IN S U
RAN
CE

IN V E S
TM EN
T
AVE N U
ES

B
o
n
d
s

Mu
tu a l
Fun
d

Pos
t
O ffi
ce
R ea
l
E st
a te
S h ares
&
D ebent
u res

1. Life insurance:
In a broad sense, life insurance can be viewed as an investment. Insurance
premiums represent the sacrifice and the assured sum the benefit.

2. Money Market Instrument:

13

Life Insurance: A Type of Investment Alternative

A debt instrument which has a maturity of less than one year at the time of
issue are called money market instruments and is also an important avenues
of investment. The important money market instruments are Treasury bill,
Commercial paper, Certificate of deposits.

3. Precious Objects:
Precious objects are the item that is generally small in size but highly
valuable in monetary terms. Some important precious objects are gold,
silver, stones.

4. Shares/ Debentures:
Companies in public and private sectors also take fixed deposits on which a
fixed rate of interest is offered. These debentures are less secure than bank
deposits; hence the interest rate would be slightly higher.
Investment in shares implies investment in ownership of companies. These
provide both earnings and appreciation. The dividend yield on shares may
be lower than interest on deposits, but shareholders hope to get higher
return in the form of higher market value when they sell the shares. The
returns in shares depend on the company performance.

5. Bonds:
Bonds are also known as debentures are secured borrowings by corporate,
which give a fixed rate of return, known as interest to the holder. A
debenture holder is legally entitled to payment of interest, whether or not
the company makes profits.

6. Mutual Funds:
Mutual funds pool resources and invest in shares/ debentures on behalf of
the investors. They collect a fee and give the money earned back to the
investors. It is comparatively less risky than investing in shares.

7. PPF/EPF:
14

Life Insurance: A Type of Investment Alternative

Public Provident Fund (PPF) provides tax free returns and hence is a very
good form of investment. Employer Provident Fund (EPF) is compulsory
saving, which get deducted from the salary.

8. Real Estate:
For the bulk of investors the most important assets in their portfolio is
residential house. In addition to the residential house, the more affluent
investors are likely to be interested in the following types of real estate:
Agricultural land, Semi-urban land, Time shares in a holiday resort.

9. Post Office:
A popular scheme of the post office provides regular monthly income to the
depositors. The minimum amount invested is Rs 1000. The interest rate is
9%. Interest income is tax exempt within certain limits as per section 80L
of the income tax act. There is no tax deduction at source.

10. Bank Deposit:
Perhaps the simplest form of investment avenues is opening a bank account
and depositing money in it. There are various kinds of account: saving
account, current account, fixed deposit, recurring deposit account. While a
deposit in current account does not earn any interest, deposits in other kinds
of bank accounts earn interest.
The following table shows various saving opportunities and the degree of
safety, liquidity and return associated with different types of investment
alternatives:

Sr. No.

Types of

Safety

Liquidity

Investment
1
2

Shares
Bonds of Financial

Expected
Return

Low
High

High
Moderate

High
Moderate
15

Life Insurance: A Type of Investment Alternative

3

Institution
Fixed deposits

High

Low

Low

4

with banks
Mutual fund units

Low

High

High

5

(equity schemes)
Mutual fund unit

Moderate

High

Moderate

6

(debt scheme)
Government PSU

High

Moderate

Moderate

7
8
10

bonds
PPF
Post office
Company deposits

High
High
Low

Low
Low
Low

Moderate
Moderate
High

11
12
13

and debentures
Life Insurance
Real estate
Gold and silver

High
Moderate
Moderate

Low
Low
High

Moderate
Moderate
Low

LIFE INSURANCE

Everyone is exposed to various risks. Future is very uncertain, but there is
way to protect one’s family and make one’s children’s future safe.

Life

Insurance companies help us to ensure that our family’s future is not just
secure but also prosperous.
16

Life Insurance: A Type of Investment Alternative

Life Insurance is particularly important if you are the sole breadwinner for
your family. The loss of you and your income could devastate your family.
Life insurance will ensure that if anything happens to you, your loved ones
will be able to manage financially.

DEFINITION OF INSURANCE
Insurance has been defined to be that in, which a sum of money as a
premium is paid by the insured in consideration of the insurer’s bearings the
risk of paying a large sum upon a given contingency. The insurance thus is a
contract whereby:

a. Certain sum, termed as premium, is charged in consideration,
b. Against the said consideration, a large amount is guaranteed to
be paid by the insurer, who received the premium,
c. The compensation will be made in certain definite sum, i.e., the
loss or the policy amount which ever may be, and
d. The payment is made only upon a contingency
More specifically, insurance may be defined as a contact between two
parties, wherein one party (the insurer) agrees to pay to the other party (the
insured) or the beneficiary, a certain sum upon a given contingency (the risk)
against which insurance is required.

IMPORTANCE OF INSURANCE

17

Life Insurance: A Type of Investment Alternative

Insurance benefits society by allowing individuals to share the risks faced
by many people. But it also serves many other important economic and
societal functions. Because insurance is available and affordable, banks can
make loans with the assurance that the loan’s collateral (property that can be
taken as payment if a loan goes unpaid) is covered against damage. This
increased availability of credit helps people buy homes and cars. Insurance
also provides the capital that communities need to quickly rebuild and recover
economically from natural disasters, such as tornadoes or hurricanes.
Insurance itself has become a significant economic force in most
industrialized countries.

Employers buy

insurance

to

cover

their

employees against work-related injuries and health problems. Businesses
also insure their property, including technology used in production, against
damage and theft. Because it makes business operations safer, insurance
encourages businesses to make economic transactions, which benefits the
economies of countries. In addition, millions of people work for insurance
companies and related businesses. Insurance as an investment that offers a lot
more in terms of returns, risk cover & as also that tax concessions & added
bonuses.
Not all effects of insurance are positive ones. The possibility of earning
insurance payments motivates some people to attempt to cause damage or
losses. Without the possibility of collecting insurance benefits, for instance,
no one would think of arson, the wilful destruction of property by fire, as a
potential source of money.

NEED FOR LIFE INSURANCE

18

Life Insurance: A Type of Investment Alternative

1. The need for life insurance comes from the need to safeguard our family.
If you care for your family’s need you will definitely consider insurance.
2. How you will be able to satisfy all those needs? Better lifestyle, good
education, desired house. But again you just cannot fritter away all your
earnings. You need to save a part of it for the future too – a wise decision.
This is where insurance helps you.
3. Factors such as fewer number of earning members, stress, pollution,
increased competition, higher ambitions etc are some of the reasons why
insurance has gained importance and where insurance plays a successful
role.
4. Insurance provides a sense of security to the income earner as also to the
family. Buying insurance frees the individual from unnecessary financial
burden that can otherwise make him spend sleepless nights.
5. The most common reason for buying life insurance is to replace the
income lost when you die. For example, say that you work, and your
income is used to support yourself and your family. When you die, and
your pay checks stops, the life insurance proceeds can be used to continue
to support the family members you’ve left behind.

As life insurance became more established, it was realized what a useful
tool it is for a number of situation as follows:-

1. Temporary needs/ threats:
The purpose of life insurance remains an important element, namely
providing for replacement of income on death etc.

2. Regular savings:
19

Life Insurance: A Type of Investment Alternative

Providing for one’s family and oneself, as a medium to long term exercise
through a series of regular payment of premiums. This has become more
relevant in recent times as people seek financial independence from their
family.

3. Investment:
Put simply, the building up of savings while safeguarding it from the
ravages of inflation. Unlike regular saving products, investment products
are traditionally lump sum investments, where the individual makes a
onetime payment.

4. Retirement:
Provision for one’s owns later years became increasingly necessary,
especially in a changing cultural and social environment. One can buy a
suitable insurance policy, which will provide periodical payments in ones
old age.

Example to understand the need for insurance:Mr. Atul is 45 and self-employed. His wife Anita, who is a housewife,
looks after their two children aged 3 and 7 years. They stay in a rented
accommodation, where the rent is 15,000 rupees per month. Mr. Atul has
taken up a loan of Rs.2lakh. His monthly earnings on average are 40,000
rupees Mr. Atul passes away in an unfortunate road accident.
Following are the some financial implications of his death on his family:The income, previously provided by Mr. Atul would stop.
His wife and children may have to seek financial assistance from other
relatives.
His wife may not have enough money to pay back the loan of Rs. 2lakhs.
The family may have to move into a cheaper accommodation.
His widow may have to take up work to earn money.
The education of his children may suffer.
The simple example illustrates the impact premature death can have on a
family, where the main earner has no life cover.
20

Life Insurance: A Type of Investment Alternative

So it is understood about the obvious benefits life insurance could offer
the typical family.
A simple life insurance policy (term assurance) could have provided Mr.
Atul’s family with a lump sum that could have been invested to provide
an income equal to all or part of his income.
There are many reasons for purchasing life insurance among which
are the following:1. Family protection to provide financial security to surviving family
members on the death of the insured person.
2. To pay for children’s education.
3. To provide fund to pay estate taxes or other final obligations necessary
to settle a deceased person’s estate.
4. To provide the funds necessary for the deceased person’s burial
expenses.
5. Accumulation of funds to supplement retirement income.

WHAT DOES LIFE INSURANCE OFFER

21

Life Insurance: A Type of Investment Alternative

Life insurance means different things to different people. For some, it
is a premium to be paid on time. For others it offers liquidity since
cash can be borrowed when needed. For the investment-minded, it
denotes a constantly growing capital account and numerous other
benefits.
Life insurance is nothing but the creation of capital funds on an
instalment basis. Only here, the results are guaranteed. Life insurance
is basically a property that is bought under a contract, accompanied by
contractual guarantees that ensure large sums of money at the death of
the insured.
Life insurance offers different things to different people which are as
follows:-

1. Insurance Buys Time and Money:
People like to refer to life insurance as time insurance, the reason
being that life insurance proceeds are paid to the insured’s
beneficiaries in case of death. The money offered by life insurance
helps buy time to adjust to the change of circumstances. Insurance
provides large amounts of cash that will keep the lifestyle for the
survivors the way it was before the insured’s death.

2. Insurance Offers Peace of Mind:
22

Life Insurance: A Type of Investment Alternative

For the person who buys an insurance policy, it offers absolute and
complete peace of mind. He or she knows that the decision made
by him will provide sound benefits in the future, whether or not the
individual may live to see it. The life insurance policy will
subsequently prove this in the future if and when funds are needed.
This is the guarantee of the insurance contract.

3. Multiple Application:
The future is uncertain for each and every one. No one knows how
long he or she will live. The investment benefit is paid to the
insured’s beneficiaries after his death or it can be used during the
life as well. Life insurance policy owners can turn to the cash value
of the policy in case of a financial emergency when all avenues are
either blocked or denied. They know that they can avail of loans
based on their insurance policies. Insurance policy owners can use
the cash value of their policies to meet their long term financial
needs as well. They may have purposefully invested in insurance to
use the cash in the policy for their children’s future marriage
expenses or higher education fees.

4. Enduring Elasticity:
Since life insurance is flexible enough to serve several needs, the
insured can keep several long term goals in mind once he or she
invests in the insurance plan. The cash value of the policy can be
allocated towards augmenting the monthly income during the
retirement years. Leisure years should be turned into pleasure
years. Permanent life insurance is designed on the concepts of long
term flexibility.
23

Life Insurance: A Type of Investment Alternative

5. Financial Security:
The insurance policy offers contractual guarantees to people
looking for peace of mind when they buy life insurance. Life
insurance offers complete financial security. The purchase of life
insurance demonstrates concern for a family’s future financial well
being.

6. Insurance is Safer:
No financial institution can do what life insurance does. No
industry can back its products with reserves and surplus as sound as
those of the insurance industry. The proof of strength and safety
that insurance companies have ensured even under the most
adverse of conditions is a matter of pride for the entire insurance
industry. For generation after generation, life insurance has been
acclaimed as the very benchmark of security against which the
other industries are measured.

HOW MUCH LIFE INSURANCE SHOULD AN
INDIVIDUAL HAVE
One of the simplest rules is to assume that insurance is a
replacement for your lost earning capacity. Calculate your total
income for the years that you expect to work.
Assuming that the prevailing interest rate is 8%, you need to
insure your life for at least 12 times your current annual income.
Assuming that a family needs Rs. 100 annually for household
expenditure and the rate of interest would be at 8% and then the
breadwinner needs to have a life insurance policy of approximately
24

Life Insurance: A Type of Investment Alternative

Rs. 1200. If the insurance amount were to be put in the bank by the
family, the family would get a comfortable Rs. 96 p.a. which would
at least let the family maintain the current lifestyle.

How much life insurance do I need?
The need for life insurance is based on various factors including
your current life-style, expected outgoings in future, your present
age and your family size.
 The first step should be to estimate how much financial support your
dependents would need in order to continue to enjoy the same lifestyle as
they enjoy today in the event that you are not around to provide that
support. In estimating this support, you should consider all regular
monthly expenses including food, rentals, conveyance, school fees,
medical expenses, any debts to be repaid etc. and also estimated ones like
for children’s education and marriage and your expected needs after
retirement.
 Always provide for unforeseen contingencies that your dependents might
need during the period of adjustment. Based on this analysis and the
expected returns on the investments in future, you can work out a sum of
money that would help your dependents achieve financial independence
even if you are not around to support them.
 While the situation of every individual would be different, and should be
evaluated separately, one rule of thumb is to buy a cover for an amount
equal to 6-10 times your annual income.
 Clearly, the need for insurance is not static and will change as your life
stage changes – so you must re-work the requirement periodically and
review the coverage available from time to time.
25

Life Insurance: A Type of Investment Alternative

RIGHT TIME TO BUY LIFE INSURANCE
Buying Life Insurance cannot ever be compared with other
investment decisions since it is very much in contrast with those
stock market investments where you wait for the right time to buy
and sell. Neither is this like receiving tips on particular scrip doing
well in the market and holding great future prospects.
This is because the future is always uncertain. Just as buying
insurance is a necessity so also buying insurance early in life is
important too. With proper financial planning one can work out as
to how much money an individual is entitled to after the end of a
particular term. A policy that will fulfil your child’s future
educational needs would have to be timed approximately so that he
receives the policy amount at that time when he needs it the most.

Why is it better to buy insurance at an early age?
Here are many advantages of buying an insurance policy as early as
possible.
1. The consideration for an insurance policy or the premium is
significantly lower at younger ages (the reason for that is as you grow
older, the mortality risk is greater and hence insurance companies
26

Life Insurance: A Type of Investment Alternative

would charge a higher premium to cover that risk). By buying a policy
at an early age, you would be able to protect your dependents against
the unforeseen event like death at a much lower overall cost.
2. As you grow older, the chances that you would suffer from health
problems are higher, and obtaining insurance could become difficult at
that stage even if you want to.
3. If you are buying insurance with a view to create a large sum of
money at a pre-determined age to meet certain planned expenses like
your children’s education or for your post-retirement expenses, then
saving early on in your life is highly beneficial. You will have to save
much more or for longer duration to get the same amount of money if
you start saving late in your life.
The premium that you pay on your insurance policy is mainly dependent
upon two things:

Your Age and the Tenure of the policy:
The younger you are the lower is your insurance premium amount. At
younger age, you would be physically sound and may not be suffering
from illness. This would entitle you to a lower premium on the policy.
Therefore it is advisable to buy insurance at an early age to reduce the
cost of insurance.

LIFE INSURANCE POLICIES
27

Life Insurance: A Type of Investment Alternative

Life insurance is an important part of wealth management planning. The
following are the most popular types of life insurance:
1.
2.
3.
4.

Whole – Life Policy
Endowment Policy
Money – Back policy
Term Policy

WHOLE – LIFE POLICY
A whole-life policy is one that covers the insured for almost all
his life. Under this type of policy, the premium is payable throughout
the life of the insured person. The policy amount is paid to the
beneficiary upon the death of the policyholder. The main advantage of
this policy is it cost. Due to its long duration, the premiums are quite
low. However, the policy also carries some advantages. As the
insurance cover continues throughout the life of the policyholder, he
continues to be insured even when his life no longer has any economic
value.

ENDOWMENT POLICY
An endowment policy is a combination of an insurance cover
and an investment vehicle. It covers the risk for a specified period, at
the end of which the sum assured is given back to the policyholder,
along with the bonus accumulated during the term of the policy. In
case of death during the term of the policy, the sum assured is paid to
the beneficiary of the policy. The major advantage of this policy is that
the insured gets a consolidated sum at the end of the predetermined
period. He can use this sum the way he likes, to buy an annuity to
generate a monthly pension for himself and spouse, or on his
children’s education or marriage, or to make any other investment of
his choice. In addition, it provides a limited life cover, thus being a
judicious mix of insurance and investment.
28

Life Insurance: A Type of Investment Alternative

MONEY BACK POLICY
Unlike ordinary endowment insurance plans where the survival
benefits are payable only at the end of the endowment period, this
scheme provides for periodic payments of partial survival benefits
during the term of the policy, of course so long as the policyholder is
alive. As important feature of this type of policy is that in the event of
death at any time within the policy term, the death claim comprises
full sum assured without deducting any of the survival benefit
amounts which may have already been paid as money-back
components. The extra premium for this benefit is very reasonable and
worth it. Among the various endowment plans, money back policies
are highly recommended.

TERM POLICY
A term policy is structured like a general insurance policy,
whereby the life of the person is insured for a specific short period,
and payment is made only if the person dies during that period. There
is no payment if the person is alive at the end of the period. As the
insured person is not entitled to any money at the end of the period if
he is alive, the cost of such policy is one of the least among the cost of
all other policy.
There are many Life Insurance Companies like:

LIFE INSURANCE CORPORATION OF INDIA
BAJAJ ALLIANZ LIFE INSURANCE COMPANY
ICICI PRUDENTIAL LIFE INSURANCE COMPANY
HDFC STANDARD LIFE INSURANCE COMPANY

29

Life Insurance: A Type of Investment Alternative

BIRLA SUN-LIFE INSURANCE COMPANY
ING VYSYA LIFE INSURANCE COMPANY
METLIFE INSURANCE COMPANY
TATA AIG LIFE INSURANCE COMPANY
MAX NEW YORK LIFE INSURANCE COMPANY
OM KOTAK MAHINDRA LIFE INSURANCE COMPANY

INVESTMENT PLANS
There are various types of life insurance policies which provide
investment benefit and are as follows:

Policies offered by Life Insurance Corporation:

LIC’s Anmol Jeevan - II is a protection plan which provides
financial protection to the insured’s family in case of his/her unfortunate
demise.
Benefits:
30

Life Insurance: A Type of Investment Alternative

Death Benefit: In case of unfortunate death of the Life Assured during
the policy term Sum Assured shall be payable.
Maturity Benefit: On survival to the end of the policy term, nothing
shall be payable.

LIC’s New Bima Bachat is a participating non-linked savings cum protection
plan, where premium is paid in lump sum at the outset of the policy. It is a
money-back plan which provides financial protection against death during the
policy term with the provision of payment of survival benefits at specified
durations during the policy term. In addition, on maturity, the single premium

shall be returned along with Loyalty Addition, if any. This plan also takes care
of liquidity needs through its loan facility.
BENEFITS:
Death benefit:
On death during the first five policy years: Sum Assured.
On death after completion of five policy years: Sum Assured along with Loyalty
Addition, if any.
b)Survival Benefits:
Payable as given below in case of Life Assured surviving to the end of the
specified durations:
For policy term 9 years: 15% of the Sum Assured at the end of each of 3rd &
6th policy year
31

Life Insurance: A Type of Investment Alternative

For policy term 12 years: 15% of the Sum Assured at the end of each of 3rd,
6th & 9th policy year
For policy term 15 years: 15% of the Sum Assured at the end of each of 3rd,
6th, 9th & 12th policy year
c) Maturity Benefit:
Payment of Single Premium (excluding taxes and extra premium, if any) along
with Loyalty Addition, if any, in case of Life Assured surviving to the end of the
policy term.

LIFE INSURANCE V/S OTHER INVESTMENT AVENUES

There are various avenues for investing of our hard-earned money. Each avenue
may yield different rate of return. No financial institution can do what life
insurance does. No industry can back its products with reserves and surplus as
sound as those of the insurance industry. The proof of strength and safety that
insurance companies have ensured even under the most adverse of conditions is
a matter of pride for the entire insurance industry. For generation after
generation, life insurance has been acclaimed as the very benchmark of security
against which the other industries are measured.
The difference between the life insurance and other investment alternatives are
as follows:

1. Contract of Insurance:
32

Life Insurance: A Type of Investment Alternative

A contract of insurance is a contract of utmost good faith. The doctrine of
disclosing all material facts is embodied in this important principle,
which applies to all forms of insurance.
At the time of taking a policy, policyholder should ensure that all
questions

in the

proposal

form are

correctly

answered. Any

misrepresentation, non-disclosure or fraud in any document leading to the
acceptance of the risk would render the insurance contract null and void.

2. Protection:
Savings through life insurance guarantee full protection against risk of
death of the saver. Also, in case of termination, life insurance assures
payment of the entire amount assured (with bonuses wherever applicable)
whereas in other savings schemes, only the amount saved (with interest)
is payable.

3. Aid to Thrift:
Life insurance encourages ‘thrift’. It allows long term savings since
payments can be made effortlessly because of the ‘easy instalment’
facility built into the scheme. Premium payment for insurance is monthly,
quarterly, half yearly or yearly.
For example: The Salary Saving Scheme popularly known as SSS
provides a convenient method of paying premium each month by
deduction from one’s salary.
In this case the employer directly pays the deducted premium to LIC. The
Salary Saving Scheme is ideal for any institution or establishment subject
to specified terms and conditions.

4. Liquidity:
33

Life Insurance: A Type of Investment Alternative

In case of insurance, it is easy to acquire loans on the sole security of any
policy that has acquired loan value. Besides, a life insurance policy is
also generally accepted as security, even for a commercial loan.

5. Tax Relief:
Life insurance is the best way to enjoy tax deductions on income tax and
wealth tax. This is available for amounts paid by way of premium for life
insurance subject to income tax rate in force. Assesses can also avail of
provisions in the law for tax relief. In such cases the assured in effect
pays a lower premium for insurance than otherwise.

6. Money When You Need It:
A policy that has a suitable insurance plan or a combination of different
plans can be effectively used to meet certain monetary needs that may
arise from time to time.
Children’s education, start-in-life or marriage provision or even
periodical needs for cash over a stretch of time can be less stressful with
the help of these policies.
Alternatively, policy money can be made available at the time of one’s
retirement from service and used for any specific purpose, such as,
purchase of a house or for other investments. Also, loans are granted to
policyholders for house or for other investments. Also, loans are granted
to policyholders for house building or for purchase of flats (subject to
certain conditions).

34

Life Insurance: A Type of Investment Alternative

LIFE INSURANCE AND RETIREMENT BENEFIT
Life insurance and related annuity products are frequently used to provide the
funding for retirement plans and other types of plans. Planning for retirement is
an important exercise for any individual. A retirement plan from a life insurance
company helps an individual insure his life for a specific sum assured. At the
same time, it helps him in accumulating a corpus, which he receives at the time
of retirement.

Why plan for retirement?
1. For too many people, the joy of retirement after years of hard work is
eclipsed by the financial uncertainties that it brings. Despite all the
planning and saving, you can never be sure whether your money will last
a life time.
35

Life Insurance: A Type of Investment Alternative

2. Retirement planning offers a way to ensure a more enjoyable, stress free
tomorrow. A prudent plan will ensure that increasing life expectancy ,
higher inflation and increasing taxes do not eat away into your hard
earned savings.

3. Security and comfort during retirement is a top priority for everyone.
Hardly any people can cope up with the task of using their accumulated
funds in the most advantageous manner possible while being able to
provide constant liquidity that cannot be outlived.

4. People tend to think that insurance is not needed after retirement. They
would willingly drop or change their permanent plans in order to provide
extra sources of income during their retirement.

During the retirement years, life insurance provides:
1. Liquidity to pay the cost of dying, which includes the funeral expenses,
prevailing debts, administration costs of estate settlement and taxes, if
any
2. Supplemental income through beneficiary arrangements for the
surviving spouse to whom the proceeds will be paid through settlement
options or other investments in order to supplement income.

36

Life Insurance: A Type of Investment Alternative

3. Increases to retirement income since permanent insurance can be
surrendered for one of the settlement options to provide a regular
income that cannot be outlived.

4. Flexibility to transfer the funds and the beneficiary named since during
the later years, the death of a spouse and a change in health or tax
considerations may make it useful for the owner of an insurance policy
to change ownership as well as beneficiary rights.

5. Donations to family and charitable organisations.

Retirement is that point in an individual’s life when the funds,
which were saved for family security in the event of the insured’s
premature death will instead be utilized to afford the family’s
supplemental income needs. At retirement, the individual may choose
to take all of the cash value accumulated in the permanent policy and
receive monthly benefits for the rest of his life or fixed amounts from
time to time. It is fairly simple to achieve this with minimal
administration costs. In case of the individual suffers from a disability,
the premiums will continue to be paid through the provisions of the
waiver of premium by the insurance company. Most plans do not
require any frequent investment decisions. And a policy provides the
flexibility needed since cash can be withdrawn for personal or family
needs. If the policy is surrendered at retirement, the cash value
proceeds are placed under a settlement option.
37

Life Insurance: A Type of Investment Alternative

There are several choices:
1. With a life income settlement option, it could provide income during
the lifetime of either one or both spouses, operating in the same
manner as other retirement benefits.
2. If the insured wishes for more payout guarantees, other options could
be chosen. One could choose a certain arrangement where payments
would be guaranteed for twenty years. If the insured dies before that
expiration date, this option will continue to pay his beneficiary for the
remaining time in the period that forms the guarantee.

3. If the insured lived beyond that date, payments would continue for
lifetime. Prospects that were not aware of this will be pleased to learn
the important role life insurance can have in their retirement plans.

Annuities and Retirement Planning:
More often, the primary purpose of an annuity is to provide retirement
income. Annuities may be used to fund individual retirement accounts
(IRAs), in which case premium payments may be tax deductible. An
annuity gives you a fixed sum of money, at periodic intervals, for the rest
of your life. Adding a tax deferred investment, like an annuity, to our
retirement plan may help you realise your retirement dreams.

How do annuities help in retirement?
38

Life Insurance: A Type of Investment Alternative

1. Lifetime Income:
If outliving your savings is a concern, an annuity could be the
solution. You can arrange to receive a steady stream of periodic
payments, for the rest of your life. Only annuities provide the
retirement income options that can protect you from outliving your
assets.

2. Competitive Interest Rates:
Annuities can offer competitive interest rates, as well as investment
flexibility. With some annuities you can “lock-in” a guaranteed
interest rate for a specified period of time.

3. Leverage the Power of Tax Deferral:
A Deferred Annuity allows you to accumulate money for retirement
on a tax- deferred basis. You put money in, and over time it earns
interest and multiplies. With deferred annuities, there are no taxes on
earnings as well. Invest in an annuity now and defer the income
receipts till you retire – an effective retirement strategy.

39

Life Insurance: A Type of Investment Alternative

LIFE INSURANCE AND TAX BENEFIT
Life insurance is bought for several reasons. Tax benefits, of course,
are a key driver for taking life insurance. Some people ‘invest’ in
insurance, thinking that returns are attractive. Very few however, buy
insurance for the right reason i.e. the life cover. In order to provide
savings and investments, the government has provided certain tax
relief in the form of tax exemptions, tax deductions and tax rebates.
Traditionally, buying life insurance has always formed an integral part
of an individual’s annual tax planning exercise. While it is important
for individuals to have life cover, it is equally important that they buy
insurance keeping both their long-term financial goals and their tax
planning in mind.
40

Life Insurance: A Type of Investment Alternative

The Income Tax Act:
 Income Deduction under Section 80CCC:
When you invest money under an approved pension plan, you
are entitled to claim an income deduction of up to Rs. 10,000
per annum or the actual amount paid as premium, whichever is
lower.
But you must always keep a few factors in mind when
considering Section 80 (CCC)

1.

Where the assessee or his nominee surrenders the Annuity before its
maturity, then the surrender value shall be taxable in the hands of the
assessee or his nominee in the year of receipt.

2. The amount of pension received will be taxable in the hands of the assessee
or nominee

Additionally, you can also claim rebate under Section 88 of the
Income Tax Act for the premiums paid.
1. Tax Rebate under Section 88:
Under section 88, from April 1, 2003, you can avail of a rebate on the tax
payable when you pay the premium for a life insurance policy as follows
41

Life Insurance: A Type of Investment Alternative

(subject to a maximum tax rebate with respect to premium paid of Rs.
70,000 per annum):
 For individuals with Gross Total Income upto Rs. 1.5 lacs, upto
20% of the premium paid
 For individuals with Gross Total Income between Rs. 1.5 lacs
and upto Rs. 5 lacs, upto 15% of the premium paid.

2. Income Deduction under Section 80D:
When you invest money in an approved policy that is taken as insurance
on your health or the health of any of the dependents, you can claim an
income deduction of up to Rs. 10,000 per annum or the actual premium
paid, whichever is lower. Certain life insurance companies also offer the
Critical Illness Rider with their products- and if the insurance company
has taken approval from the Income Tax Authority, benefit under Section
80D is also available for the Rider Premium. In case such a policy is
taken by Senior Citizen (as defined by the Income Tax Act), the income
deduction is available up to an amount of Rs. 15,000 per annum or the
actual premium paid, whichever is lower

3. Income Deduction under Section 80DD:
When you invest money in approved policies intended to cover the cost
of maintenance including medical treatment of a disabled dependent, and
then you can claim an income deduction of an amount up to Rs. 40,000
per annum or the actual premium paid, whichever is lower.

4. Exemption under Section 10 (10D):

42

Life Insurance: A Type of Investment Alternative

The proceeds from any insurance policy are completely exempt from
income tax except in case of maturity value of policies where the annual
premium is in excess of 20% of the sum assured.

LIFE INSURANCE AND SAVINGS
1. An insurance contract provides risk coverage to the insured. When
however, the contract period covered a long time, as in case of life
insurance, premium payment have two components. One goes toward
savings.
2. The saving component of life insurance pits the insurer in direct
competition with other financial institution and saving instruments,
such as bank deposit, equities and mutual fund.

43

Life Insurance: A Type of Investment Alternative

3. The bundling together of risk coverage and savings is peculiar to the
life insurance. In case of life insurance the insured cannot reclaim the
saving component without some penalty.

4. Cash value life insurance provides both death benefits and a savings
feature. When you buy a permanent or cash value policy, part of your
premium pays for the life insurance protection and part goes towards
the savings component.

5. As you pay your premiums the savings portion is invested, and the
principal and earnings accumulate as your cash value.

6. You are not required to leave the funds in the policy, however you can
sometimes withdraw from or borrow against the accumulated cash
value.

7. You can then use the withdrawn or borrowed funds to finance your
retirement, pay a child’s college tuition, or assist a child with a down
payment on a house, among other things.

8. This type of insurance can be a valuable asset, both as an investment
and for life insurance purposes.

Advantages of using life insurance as a savings vehicle:
 It provides life insurance protection for your family.

44

Life Insurance: A Type of Investment Alternative

 You can earn money on your premium payments (depending on
investment performance)

 The cash value grows tax deferred until withdrawn or
surrendered.

 Sometimes you can withdraw from the cash value (generally up
to a certain percentage).

 You can borrow from the cash value at a relatively low interest
(the amount you can borrow will vary by policy type).

 You may have a number of investment choices (depending on
policy type).

ANALYSIS:
1. Number of people who make investment for their
future
A survey was conducted for the people who has invested in
future plan. Thus the count for this question is 100%.

2. Number of people who invest in different types of
investment avenues

45

Life Insurance: A Type of Investment Alternative

It is observed that 100% of the people invest in different
investment alternatives. Few people only invest in life
insurance policy and some do not invest in insurance policies.

3. Number of people making investment in different
type of avenues
Number of people
Investment Avenues
Life Insurance
Bank Deposit
Post Office
Shares & Debentures
Precious Objects
Real Estate
PPF & EPF
Mutual Funds
Money Market

investing
21%
13%
13%
9%
8%
12%
8%
8%
8%

Instruments

46

Life Insurance: A Type of Investment Alternative

It is observed that 21% people invest in insurance policies and
13% people invest in bank deposits. There are few investments
in shares & debentures, precious objects.

4. What influence you to take up insurance policy?

60%
50%
40%
30%
20%
10%
0%

47

Life Insurance: A Type of Investment Alternative

It is observed that people invest in LIC majorly for security
purpose & tax saving. Few people invest in LIC for investment
purpose. Very few people believe that LIC would provide them
Retirement benefits.

5. Which of the insurance policy you prefer the most?

50.00%
45.00%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%

48

Life Insurance: A Type of Investment Alternative

It is analysed that majority of the people prefer money back
policy. Only few people are in the favour of endowment policy,
whole life policy and term life policy.

6. What influenced you to take life insurance policy?

49

Life Insurance: A Type of Investment Alternative
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Personal Interest Family

Agents Advertisements Others

Tax Saving

It is observed that majority of the people have invested in life
insurance as their personal interest. Few of them were influenced by their
family and agents. Some found it tax saving investment. Only few people were
influenced by advertisements.

7. Have you taken life insurance for your family?

50

Life Insurance: A Type of Investment Alternative

Majority of the people that is 70% have taken life insurance
policy for their family and only few people have not taken
insurance policy for their family.

8. At which age you took life insurance policy?

60%

1

2

3

50%

40%

30%

20%

10%

0%

20-30

30-40

40-50

Majority of the people have invested at the age of 20-30 and
30-40 and very few of them have invested at the age of 40-50.

51

Life Insurance: A Type of Investment Alternative

9. What percentage of income do you invest in your
life insurance policy?

70.00%

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%

0-10%

10-20%

20-30%

It is observed that majority of the people invest 0-10% of their
income. Few of them invest 10-20% of their income and very less people invest
20-30% of their income.

52

Life Insurance: A Type of Investment Alternative

10. Name the company in which you are having life
insurance policy?
Majority of the people have invested in Life Insurance
Corporation. They have invested in endowment policy, money
back policy, term policy and whole life policy. Few people
have invested in Bajaj Allianz and very few have invested in
Max Life Insurance and Tata AIA.

11.

Are you satisfied with your current life insurance

company?

Yes

No

17%

83%

53

Life Insurance: A Type of Investment Alternative

It is analysed that majority of the people are satisfied with their
insurance company for providing them services. Very few are not satisfied with
their company.

12.

How do you rate the service offered by your life

insurance company?
45.00%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
Excellent

Very Good

Good

Average

It is observed that 40% of the people rate the service good as offered by the
insurance company. 24% rate it as very good.

54

Life Insurance: A Type of Investment Alternative

13.

Whether life insurance policy is important

investment avenue from other investment avenues?

No; 20%

Yes; 80%

It is observed that 80% of the people find life insurance policy as
important investment avenues.

55

Life Insurance: A Type of Investment Alternative

OBSERVATION
1. The majority of respondents belonged to the age group of
20 to 30 years which followed by age group of 30 to 40
years.
2. LIC has a major market share.
3.

The factors which influenced to select a life insurance
company are the personal factor, followed by family, friends,
agents and advertisements.

4. Majority of consumers are satisfied with the service and
quality of products of their life insurance companies.
5. Majority of the respondents invest in life insurance policies for
security purpose followed by tax savings, investment and
retirement benefits.

6. Majority of the people have taken life insurance policy for
their family.

56

Life Insurance: A Type of Investment Alternative

LIMITATIONS
It is difficult to know if all the respondents gave accurate information; some
respondents tend to give misleading information.

57

Life Insurance: A Type of Investment Alternative

CONCLUSION
From this study it reveals that the consumer’s attitude towards Insurance Policy
and Insurance Company changed a lot. 5 years before the consumers and the
general public were not interested to take an Insurance Policy but now days
there are many options and choices in front of the customers.
They are interested to take high return policies in order to secure their lives.
People are aware of all the benefits and returns of insurance policies. As a result
of this new international and domestic companies are coming to the Indian
Market.
Since there are many players in the Indian Insurance Market the competition
level is very high. So the companies are introducing new schemes.
From this it is found that The LIC is the major market share holder in the
insurance field. Even if there are many players in this field still it is an untapped
market.
Insurance may not be the best place to invest your hard-earned money. But there
are sufficient reasons for one to believe that it can be a highly lucrative avenue
to facilitate savings.
It is extremely unfair to compare the performance of insurance against other
investments without considering the core features of insurance. The very
essence of insurance is to protect your family from the uncertainty of your life.
Now, let us compare insurance as an investment options. If you invest Rs.
10,000 in PPF, your money grows to Rs.10, 950 at 9.5% interest over a year.
But in this case, the access to your funds will be limited. One can withdraw few
percent of the initial deposit after a particular period of time. The same amount
of Rs. 10,000 can give you an insurance cover of up to approximately Rs 5-12
58

Life Insurance: A Type of Investment Alternative

lakhs (depending upon the plan, age and medical condition of the life insured
etc) and this amount can become immediately available to the nominee of the
policyholder on death. Thus insurance is not 100% but 1000% more better
investment option as compared to other investment avenues.

59

Life Insurance: A Type of Investment Alternative

APPENDIX
Questionnaire

1. Do you make investment for your future?
Yes

No

2. Do you invest in different types of investment avenues?
Yes

No

3. Which are those investment avenues?
Post Office

Real Estate

Bonds

Shares & Debentures

PPF & EPF

Bank Deposit

Precious Objects

Money Market Instruments

Mutual Funds

Life Insurance
4. What influence you to take up insurance policy?
Tax Saving
Security Purpose

Retirement Benefits
Investment

5. Which of the insurance policy you prefer the most?
60

Life Insurance: A Type of Investment Alternative

Whole Life Policy
Term Policy

Endowment Policy
Money Back Policy

6. What influenced you to take life insurance policy?
Personal Interest
Agents

Friends

Advertisements

Family
Others

7. Have you taken life insurance for your family?
Yes

No

8. In which age you took life insurance policy?
20-30

30-40

40-50

50-60

9. What percentage of income do you invest in your life insurance policy?
0-10%

10-20%

20-30%

30% & above

10. Name the insurance company in which you are having life insurance
policy?

11.Are you satisfied with your current life insurance company?
61

Life Insurance: A Type of Investment Alternative

Yes

No

12.How do you rate the service offered by your Life Insurance Company?
Excellent

Very Good

Average

Poor

Good

13. Whether life insurance policy is important investment avenue from other
investment avenues?
Yes

No

BIBLIOGRAPHY
www.licindia.in
www.wikipedia.com
www.google.com

62

Life Insurance: A Type of Investment Alternative

63

Sponsor Documents

Or use your account on DocShare.tips

Hide

Forgot your password?

Or register your new account on DocShare.tips

Hide

Lost your password? Please enter your email address. You will receive a link to create a new password.

Back to log-in

Close