- Date : 18/03/2023
- Read: 4 mins
Comparison of Traditional Life Insurance Vs Term Insurance and Mutual Funds
The tax-free maturity proceeds of life insurance policies are a popular reason people invest in these policies, even to the point of being over-insured. However, Budget 2023 has proposed that from the financial year 2023-24, if the premium of traditional non-ULIP policies like money-back and endowment exceeds Rs. 5 lakh during the year, the maturity proceeds of such policy(s) will be taxable. This is a deviation from the existing rule, which says that maturity proceeds of life policy are tax-free as long as the annual premium doesn’t exceed 10% of the sum assured. As a result, the debate over term insurance vs traditional insurance gets a fresh perspective.
Traditional insurance plans offer life cover along with guaranteed maturity returns. ULIPs, on the other hand, are non-traditional as their return is market-linked and hence not guaranteed. Term insurance is simple life insurance for a low premium and no maturity benefits.
Traditional vs Term Plan
Traditional insurance plans are suitable for conservative investors who want life cover and something in return for the amount paid as a premium.
It cultivates saving habits while increasing insurance coverage among people. But, on the flip side, the premium amount in traditional insurance is higher than the sum assuredly offered, and the rate of return is low.
Term insurance policies offer a significant amount as a sum assured, yet the premium amount is relatively low. In case of fatality, the term insurance claim amount takes care of the financial support the surviving family needs.
However, policy buyers are often conscious that they need to get the amount spent on term life insurance back in their lifetime.
Traditional life insurance policies have become unattractive with the latest budget proposal. These policies have always been a mixed bag of returns for investors. Unlike term insurance, you get maturity benefits and life coverage. But, on the other hand, these policies offer comparatively lower life cover.
For a fraction of the sum assured by term plans, traditional plans offer an actual 4-6% return, barely enough to beat inflation. Last but not least, the premium for a term plan is significantly lower than an endowment or money-back policy.
This begs the question, should you combine investment and insurance?
Term Plan and Investment
Rather than remaining underinsured and getting an average return on maturity, you can go for term insurance and invest the amount saved through the lower premium.
Let us take the example of the popular LIC endowment plan, LIC Jeevan Anand, for a 30-year-old. To get a 20-year coverage of Rs. 1 crore, the annual premium would amount to Rs. 5.7 lakhs. So at the end of 20 years, you can expect Rs. 1.9 to 2 crores at around 5% return.
However, if you go for a simple LIC term plan instead, a 20-year coverage for Rs. 1 crore sum assured would cost you a premium of Rs. 11,000. If you invest the amount not invested in the endowment policy in a mutual fund, you will be investing close to Rs. 5.6 lakh annually. Long-term investment in a mutual fund for 20 years at a 10% return will give you Rs. 3.5 crores!
Mutual fund income is subject to long-term capital gain. However, even after the tax liability, this investment's net return is likely significantly higher than the return from an endowment policy.
Considering this, an investment in term insurance and mutual funds can reap a higher return than a traditional life insurance policy.