Investing your life insurance is an option that may fit your financial picture. But be aware that there are other traditional investment options that offer different risk profiles and growth potential.
Whole life insurance policies have an investment component that grows cash value alongside providing a death benefit. But they come with high fees and are best suited for people who have maxed out other tax-advantaged savings and investment accounts. Keep reading for more information in this article.
Traditional Investment Options
The primary reason people buy life insurance is to leave a death benefit for their beneficiaries. But some people use it to invest money while alive, too. This type of investment is usually called “cash value,” and it can be accessed through several ways. Withdrawals up to the cost basis (the amount paid into the policy) are tax-free, and the policy can be borrowed against at low interest rates.
However, the returns on these policies are typically below market rates. Also, these investments may lose value over time. Nevertheless, they can be a useful tool to meet your non-negotiable goals such as children’s education or marriage, and they offer tax benefits under Section 80C. However, this is only applicable for policies with annual premiums below INR 2.5 lakh.
Stock Funds
Many life insurance policies build cash value over time, which may serve as an investment. However, it’s important to understand how the policy functions as a whole before using it as an investment tool.
For example, a portion of your premium will go toward fees and commissions before the cash value begins to grow. It can take up to 15 years before you start earning significant returns on your investment.
You can also invest in mutual funds or exchange-traded funds (ETFs), which hold a mix of individual stocks. These are usually less risky than investing in individual stocks and can help diversify your investment portfolio. Speak with a fee-only financial advisor to determine if these investments are right for you.
Bond Funds
Adding a bond fund into your life insurance portfolio can offer you a way to diversify your investments, reduce volatility and generate steady income. But it’s important to understand the fees and risks involved with each investment option.
Investment bonds are also tax-efficient vehicles for investing, especially if you’ve already maxed out your Individual Savings Account allowance. Income withdrawn from investment bonds is not subject to basic rate tax, while loans against the cash value of the policy are typically interest-free.
But the odds aren’t in your favor with this leveraged strategy, particularly since the insurance company controls both the rate of return and borrowing costs. It’s always worth speaking with an Independent Financial Adviser before making any investments to ensure they fit your current circumstances, specific goals and future aspirations.
Balanced Portfolios
Generally, balanced funds invest in multiple types of stocks and bonds, providing diversification that can reduce risk. They also tend to have lower total expense ratios than mutual funds and ETFs, which invest in just one type of stock or bond.
Depending on your time horizon, you can choose a balanced fund that matches your desired level of risk. For example, a 60/40 mix may be more conservative for younger investors and more aggressive for retired individuals.
ULIP plans (unit-linked insurance plans) can be invested in equity, debt or a hybrid of both. They also allow you to make adjustments in the equity-debt ratio based on market conditions and your personal investment goals. Equity-oriented funds qualify for tax*-free gains if held for more than 36 months.
Emergence of Socially Responsible Investing (SRI)
Socially Responsible Investment (SRI) is a great way to make sure that your business practices align with your moral and ethical values. It also helps you to mitigate environmental harm and improve financial performance.
For example, if you have a business that uses child labor, this adversely impacts society. Therefore, an ethical investor will avoid investing in this type of company.
While SRI is a great way to help society, it is important to remember that investing is ultimately, still a financial activity. Therefore, you must weigh the pros and cons of each opportunity. Investing responsibly can help you achieve your financial goals, but you must always keep in mind the risks that come with investing. Taking the time to research each option can ensure that you are making the best decision for your needs and goals.
