Life Insurance vs Mutual Funds - Which Is Better?

First things first - investment and insurance simply don't mix. Mutual Funds are investments, and life insurance has barely anything to do with investments. Ironically enough, a majority of Indians consider life insurances to be safe, ideal and the best investment option. The general tendency is to keep a distance from Mutual Funds, which are regarded as "risky" investments. This attitude can be attributed to general ignorance and lack of foresight.

However, investing into the right tax saving fund is a common objective of all working individuals, yet a majority of the Indian working populace is forever confused. So, let's start from scratch by attempting to comprehend the difference between the two before determining which tax saving fund is ideal to invest in.

What are Mutual Funds?

Mutual Funds are professionally managed investments - a managed portfolio of stocks and bonds. Simply put, mutual funds are like baskets containing a diversified blend of stocks and bonds from various companies across different industries. When you purchase a mutual fund, you are basically buying one of these baskets that contains dozens (or even hundreds) of stocks from numerous companies. This is quite different from how stock market invesments work.

However, you don't get to buy a basket and lock it away for a certain period. As these are professionally managed investments, the fund managers decide what proportions of stocks your basket should store after carefully researching and predicting the market growth. They constantly shuffle the goodies in your basket to make sure that you profit from the market fluctuations. On an average, you can expect a steady annual return of at least 8% on these investments.

So, even if you are a risk-averse person, your money isn't at stake, and you can peacefully invest in these products for a long term. Tax saving mutual funds are all the more safe baits.

What are Insurances?

The Oxford English Dictionary defines insurance as "An arrangement by which a company or the state undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium." Drawing on this definition, we can define life insurance as a similar arrangement in which the insurer compensates your survivors if you die; all you need to do is pay a specific amount for a specific period.

This is the pure and unadulterated definition of life insurance, which is commonly marketed as Term Insurance. However, there are several other types of insurances that are quite complicated.

What's the Problem?

The world of insurances is indeed mysterious. Investing your hard-earned money into them without adequate knowledge of what is to become of that amount is the biggest problem. Let us try to understand the complicated world of insurance in extremely simple words.

The Simple Ones

Term life insurances are pure protection products - they are available at a low cost and do not pay dividends. To put it in the simplest of words, if you purchase a term life insurance policy, you keep paying a certain premium towards the policy for a specific period - you won't get back a single penny from this policy. Your family gets a substantial fortune when you depart for your heavenly abode. A purist might not consider this a financial investment.

However, you and I can treat it as an investment in financial security as it pays a cash benefit to your family when you're not around to support them anymore. It just compensates the loss of income arising out of your death. On an average, a 30-year-old non-smoker can easily get a cover of Rs.1 crore by paying just Rs.12,000 a year. The premium amount of such policies is exempted from income tax. That's life insurance - simplified for you.

The Beguiling Ones

Insurance companies, however, have diversified their offerings and introduced several types of life insurance products which claim that they will return the premium after a specific period. Endowment Plans, ULIPs, Money Back Plans, Whole Life Plans, Annuity Plans and the likes belong to this category. These schemes have been cleverly designed by mixing insurance with investment.

The insurance companies position these products in such a way that they appear as lucrative investment options. Millions of Indians are tempted by the plethora of benefits, bonuses, coverage and a lump sum maturity amount that these policies offer. They rampantly purchase these products, not realizing that the apparently lucrative maturity value will be worth very little if inflation is accounted for.

Tax Saving Options - Tax Saving Investment Options

As the time comes for declaring your investments and filing your income tax returns, you might be in a state of confusion about where to invest so that you get the maximum rebate. There is no shortage of advice on things like fixed deposits, tax deductions, and insurance policies from friends, family, and colleagues. But that advice might be generic and may not give you the maximum benefits. You might be wondering how to juggle different modes of investment, which options are risky, and which are safe.

mymoneykarma is your friend in need. After carefully assessing several tax saving options for 2019 by their returns, risks involved, costs, transparency, and taxability of income, we’ve come up with a list of the top ten tax-saving opportunities designed to cater to your financial needs. You can invest in a combination of different options to get maximum benefits.

ELSS funds

Equity-linked savings schemes are excellent ways of saving your taxes under Section 80C. You can invest as much as you want, but any excess amount over Rs.1.5 lakh will not let you avail of the tax benefits under Section 80C. ELSS funds are of two main types: growth funds and dividend funds. Growth funds are suitable for investors who are looking to invest for an extended period and receive the full value of their funds only at the time of redemption. Under dividend fund, investors receive tax-free payouts that they can reinvest as fresh investments.

Contrary to a popular myth, all ELSS funds aren’t necessarily risky. While some funds dedicate more to small- and mid-cap stocks, some others stick with stable large-cap stocks.  You must choose the one that best suits your risk appetite.

National Pension Scheme

The National Pension Scheme or NPS is a government-sponsored pension scheme launched in 2004. A subscriber can regularly contribute in a pension account during his/her professional life, withdraw some amount from a lump sum and use the remaining corpus to buy an annuity to secure a regular income after retirement.

NPS can help save tax under different sections. You can claim contributions of up to Rs 1.5 lakh as deductions under Section 80C. There is a provision of an additional deduction of up to Rs 50,000 under Section 80CCD(1b). If the employer contributes up to 10% of one’s basic salary in the NPS, the amount cannot be taxable.

Public Provident Fund

Public Provident Fund (PPF) scheme is a popular long-term investment option offered by the Government of India. It provides a stable investment option with attractive rates of interest and other facilities such as loan, withdrawal, and extension of account.

PPF is an excellent option for the cautious investor because the interest is tax-free, giving the scheme a significant advantage over fixed deposits. PPF performs exceedingly well on safety, flexibility, and ease of investment.

Senior Citizens’ Saving Scheme

Investing in Senior Citizen's saving scheme is extremely beneficial for senior citizens in getting the most out of their tax deductions. It is an effective and long-term saving option that offers security and features of any government-sponsored investment scheme. These schemes are available at certified banks and post offices across India. Last year’s Budget has made the Senior Citizens’ Savings Scheme (SCSS) more attractive by offering senior citizens an additional Rs. 50,000 exemption on interest income. The total tax exemption for senior citizens is Rs. 3.5 lakhs.

Sukanya Samriddhi Yojana

For parents with daughters below 10 years of age, the Sukanya Samriddhi Yojana can be an excellent way to invest for their daughters. The interest rate of 8.5% is linked to the yield of government bonds and is subject to change every quarter. The Sukanya scheme offers a higher interest rate than PPF. There is an annual cap of Rs. 1.5 lakh on the investment. A parent can open accounts at any post office or designated banks with a minimum investment amount of Rs. 250. Any parent can open an account for their daughter. The account can be opened for at the most two girls, but the combined investment in the two accounts cannot exceed Rs. 1.5 lakh in a year, and the maturity proceeds have to be used for her education and marriage.

ULIPs

ULIP stands for unit-linked insurance plans. A ULIP contains both the elements of insurance and investment. The policyholder can either pay a monthly or annual premium. A small percentage of the premium goes toward life insurance, and the residue amount is invested just like a mutual fund. The policyholder goes on investing throughout the term of the policy years and collects the units later. These plans offer investors the option to invest in equity and debt.

Pension Plans

Also known as company pension plans, pension plans are set up by employers and can provide benefits including a tax-free lump sum (within certain limits), and pension income in retirement.

These benefits are based on the following parameters:

1. your final earnings

2. your average earnings throughout your career, or

3. the value of your pension fund at retirement.

Apart from benefits on retirement, pension schemes can provide benefits to dependants on the death of the account holder during service or after retirement. Pension benefits are also portable and need not be "frozen" when your employment status changes.

You should check if your employer has such a scheme and whether you are eligible to join. Or you may have been a member of such a pension scheme in the past and still have benefit entitlements under the plan.

NSCs

The best thing about the National Savings Certificates (NSC) is that unlike an insurance policy or a pension plan, they don't require a multi-year commitment. NSCs is perfect for those who don’t have time to browse through the features of an investment plan. At an interest rate of 8%, it is a good option for those who just want to invest in a hurry and forget about it. NSCs promise better returns than bank FDs. The interest earned on the NSC is eligible for deduction under Section 80C in the subsequent years. NSCs are suitable for senior citizens who want to invest safely but have exhausted the Rs 1.5 lakh limit of SCSS. Since there are no such restrictions in NSCs, they can use this instrument to save income tax.

Bank FDs

Tax-saving bank fixed deposit is an excellent choice for people who leave their tax planning for the last minute and then search for the best option. Although the interest rates are not as high as other savings instruments, FDs offer the convenience of online banking. If you have to show proof of investment this week, all you have to do is log on to your netbanking account, make the investment, download the proof and print it. However, this convenience comes at a high price. The interest earned on FDs is fully taxable, which reduces the post-tax return for people in the higher income bracket.

Life Insurance

Life insurance policies are essential for the safety and security of you and your family, but they are the least effective instruments to save income tax. They give fewer returns, have reduced rates of interest, and the interest collected is not even tax-free. However, it is a highly preferred mode of investment among the Indian populace; and if you wish to channelize your hard-earned money into insurance, then you must do a careful homework before taking a call.

Choosing the Right Option

Section 80C allows you to save up to Rs. 1.5 lakhs across different tax-saving investment instruments; so you might as well maximize your tax deductions. Investing in more than one option and taking calculated risks can pay off in the form of very high dividends that can be used to fund your dreams.

Top Life Insurance Policies for 2021

Unfortunately, no one is invincible. No matter how advanced science and civilization is now, there are still uncertainties like heath, disability and disease. These can happen at any moment. Because of this, one needs to get the best possible term life insurance in order to secure the financial future of his or her loved ones.

In our country, there are 24 insurance companies that offer term life insurance plans. Since there are so many products out there, it is easy to feel confused. To bring down your worries, here is a list of the top 6 term life insurance plans for 2020 and 2021.

These are effective enough to be useful during the hard times, and are sold by insurance companies having the best claim settlement record in the whole market.
Details of the life insurance plans
LIC Tech Term Insurance Plan

This offers all the needed protection to the family of the insured in case of the insured person’s death.

Features and benefits:

• Premiums you pay per year are deductible for taxes.
• NRIs shall be covered under this plan even if they are not in India but they need to be in the country for medical tests
• The company offers a free lock-in period. The policy holder can then return the policy within that duration if the person is not satisfied by the clauses.
• You can get the plan through an online application process without the need of intermediaries.

 
ICICI Prudential iProtect Smart Term Plan

This is a highly effective plan that offers a 360 degrees coverage at a very affordable premium.

Features and benefits

• The plan gives female policyholders an extensive coverage for breast and cervical cancer under the Accelerated Critical Illness Benefit.
• Policyholders have the option to choose accidental death benefit and the accelerated critical illness benefit.
• The surrender value is applicable to one single premium
• The policyholder is eligible to get tax benefits for premiums paid.

SBI Life Shield

It is a type of non-linked and non-participating insurance plans. It offers a high coverage in return of minimum premiums.

Features and benefits

• It offers 30 days to review the terms and conditions.
• Your paid premiums are tax exempted.

It has two options: Increasing Cover and Level Cover. Both of these covers have the accelerated terminal illness benefit. Should you want to go with increased power, your assured sum shall increase by 10% after each 5 years of policy tenure.

The plan comes with an option to increase the coverage through riders like SBI life-accidental death benefit rider & SBI life-Accidental total & permanent disability benefit rider.

HDFC Click 2 Protect 3D Plus Term Plan

This plan covers three uncertainties like disability, disease and death. It is mainly for women and children.

Features and benefits

• Policy holders who are women and are non-smokers can get the plan at a low premium.
• It gives maximum flexibility for premium payouts, terms and more.
• If you give premiums regularly, you can get tax benefits.
• This plan gives you as many as 9 options to choose from.

Max Life Smart Term Plan

This plan gives you comprehensive protection against as many as 40 critical illnesses, death, disability and gives financial protection for the family in case of the policyholder’s absence.

Features and benefits

• Coverage can be enhanced with riders like accidental cover and accelerated critical illness if you pay more premiums.
• It gives 7 variants of death benefits.
• There are various premium payment options.

Edelweiss Tokio Life – My Term+

It offers pure risk coverage. It covers you and your spouse and also gives the additional benefit of a limited premium payment plan.

Feature and benefits

• It offers a waiver of premium benefit under which you don’t need to pay the premiums if you are diagnosed by any one of the 12 listed critical illnesses
• It gives three death benefit payout options
• Premiums paid and received are tax free

So, there you have it! The top life insurance plans for 2020-2021.

Top Life Insurance Policies for 2021

 Unfortunately, no one is invincible. No matter how advanced science and civilization is now, there are still uncertainties like heath, disability and disease. These can happen at any moment. Because of this, one needs to get the best possible term life insurance in order to secure the financial future of his or her loved ones.

In our country, there are 24 insurance companies that offer term life insurance plans. Since there are so many products out there, it is easy to feel confused. To bring down your worries, here is a list of the top 6 term life insurance plans for 2020 and 2021.

These are effective enough to be useful during the hard times, and are sold by insurance companies having the best claim settlement record in the whole market.

Details of the life insurance plans
LIC Tech Term Insurance Plan

This offers all the needed protection to the family of the insured in case of the insured person’s death.

Features and benefits:

• Premiums you pay per year are deductible for taxes.
• NRIs shall be covered under this plan even if they are not in India but they need to be in the country for medical tests
• The company offers a free lock-in period. The policy holder can then return the policy within that duration if the person is not satisfied by the clauses.
• You can get the plan through an online application process without the need of intermediaries.

 
ICICI Prudential iProtect Smart Term Plan

This is a highly effective plan that offers a 360 degrees coverage at a very affordable premium.

Features and benefits

• The plan gives female policyholders an extensive coverage for breast and cervical cancer under the Accelerated Critical Illness Benefit.
• Policyholders have the option to choose accidental death benefit and the accelerated critical illness benefit.
• The surrender value is applicable to one single premium
• The policyholder is eligible to get tax benefits for premiums paid.

SBI Life Shield

It is a type of non-linked and non-participating insurance plans. It offers a high coverage in return of minimum premiums.

Features and benefits

• It offers 30 days to review the terms and conditions.
• Your paid premiums are tax exempted.
• It has two options: Increasing Cover and Level Cover. Both of these covers have the accelerated terminal illness benefit. Should you want to go with increased power, your assured sum shall increase by 10% after each 5 years of policy tenure.
• The plan comes with an option to increase the coverage through riders like SBI life-accidental death benefit rider & SBI life-Accidental total & permanent disability benefit rider.

HDFC Click 2 Protect 3D Plus Term Plan

This plan covers three uncertainties like disability, disease and death. It is mainly for women and children.

Features and benefits

• Policy holders who are women and are non-smokers can get the plan at a low premium.
• It gives maximum flexibility for premium payouts, terms and more.
• If you give premiums regularly, you can get tax benefits.
• This plan gives you as many as 9 options to choose from.

Max Life Smart Term Plan

This plan gives you comprehensive protection against as many as 40 critical illnesses, death, disability and gives financial protection for the family in case of the policyholder’s absence.

Features and benefits

• Coverage can be enhanced with riders like accidental cover and accelerated critical illness if you pay more premiums.
• It gives 7 variants of death benefits.
• There are various premium payment options.

Edelweiss Tokio Life – My Term+

It offers pure risk coverage. It covers you and your spouse and also gives the additional benefit of a limited premium payment plan.

Feature and benefit

• It offers a waiver of premium benefit under which you don’t need to pay the premiums if you are diagnosed by any one of the 12 listed critical illnesses
• It gives three death benefit payout options
• Premiums paid and received are tax free

Life Insurance vs Mutual Funds - Which Is Better?

However, investing into the right tax saving fund is a common objective of all working individuals, yet a majority of the Indian working populace is forever confused. So, let's start from scratch by attempting to comprehend the difference between the two before determining which tax saving fund is ideal to invest in.

What are Mutual Funds?

Mutual Funds are professionally managed investments - a managed portfolio of stocks and bonds. Simply put, mutual funds are like baskets containing a diversified blend of stocks and bonds from various companies across different industries. When you purchase a mutual fund, you are basically buying one of these baskets that contains dozens (or even hundreds) of stocks from numerous companies. This is quite different from how stock market invesments work.

However, you don't get to buy a basket and lock it away for a certain period. As these are professionally managed investments, the fund managers decide what proportions of stocks your basket should store after carefully researching and predicting the market growth. They constantly shuffle the goodies in your basket to make sure that you profit from the market fluctuations. On an average, you can expect a steady annual return of at least 8% on these investments.

So, even if you are a risk-averse person, your money isn't at stake, and you can peacefully invest in these products for a long term. Tax saving mutual funds are all the more safe baits.

What are Insurances?

The Oxford English Dictionary defines insurance as "An arrangement by which a company or the state undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium." Drawing on this definition, we can define life insurance as a similar arrangement in which the insurer compensates your survivors if you die; all you need to do is pay a specific amount for a specific period.

This is the pure and unadulterated definition of life insurance, which is commonly marketed as Term Insurance. However, there are several other types of insurances that are quite complicated.

What's the Problem?

The world of insurances is indeed mysterious. Investing your hard-earned money into them without adequate knowledge of what is to become of that amount is the biggest problem. Let us try to understand the complicated world of insurance in extremely simple words.

The Simple Ones

Term life insurances are pure protection products - they are available at a low cost and do not pay dividends. To put it in the simplest of words, if you purchase a term life insurance policy, you keep paying a certain premium towards the policy for a specific period - you won't get back a single penny from this policy. Your family gets a substantial fortune when you depart for your heavenly abode. A purist might not consider this a financial investment.

However, you and I can treat it as an investment in financial security as it pays a cash benefit to your family when you're not around to support them anymore. It just compensates the loss of income arising out of your death. On an average, a 30-year-old non-smoker can easily get a cover of Rs.1 crore by paying just Rs.12,000 a year. The premium amount of such policies is exempted from income tax. That's life insurance - simplified for you.

The Beguiling Ones

Insurance companies, however, have diversified their offerings and introduced several types of life insurance products which claim that they will return the premium after a specific period. Endowment Plans, ULIPs, Money Back Plans, Whole Life Plans, Annuity Plans and the likes belong to this category. These schemes have been cleverly designed by mixing insurance with investment.

The insurance companies position these products in such a way that they appear as lucrative investment options. Millions of Indians are tempted by the plethora of benefits, bonuses, coverage and a lump sum maturity amount that these policies offer. They rampantly purchase these products, not realizing that the apparently lucrative maturity value will be worth very little if inflation is accounted for.

The Dilemma

Let's try to understand how these insurance-cum-investment products work. Well, it's true that the hybrid insurance policies offer insurance coverage and simultaneously allow you to capitalize on various investment instruments like stocks, bonds and mutual funds. Let's say you decide to invest Rs.50,000 into an insurance-investment hybrid product. As insurances are meant to provide death benefits, a chunk of the invested amount is directed towards the life cover.

Let's assume that Rs.10,000 goes towards life coverage, and you don't earn a penny on this amount. The remaining Rs.40,000 becomes your investment. Alternatively, you can buy a term insurance policy with Rs.10,000 out of Rs.50,000 and invest the remainder in mutual funds. What difference does it make?

Most importantly, the hybrid insurance plans pay you round 5-6% return on the invested amount, which is much lesser than the minimum returns of 8% that you can expect from mutual funds. The hybrid insurances don't let your entire money grow. Moreover, term insurances generally insure you for much more than ULIPs and Endowments plans do.

People looking for life insurances undoubtedly want to leave a substantial corpus for their beneficiaries - the hybrid policies do not provide as high a death benefit as term life insurances do. It makes more sense to invest in a mutual fund to grow your money and enjoy it while you live; simultaneously, purchase a term life insurance for your family's future needs. That would be a better and smarter financial move.

How Can Freelancers Manage Their Money?

 There are many benefits when you are your own boss. You can work when you want to, with whom you want to. You have the luxury of choosing your own clients, and can even work in your pajamas! In fact, working from the beach has always been the dream for freelancers!
Get your free Credit

1. Build your Credit Score

2. Reduce your Current Borrowing / EMI Costs

However, at the end of the day, things are not always so good. For freelancers, life is not a party because there is a price to be paid for becoming one. First of all, income flow is uneven, and unless you pay close attention to it, you can fall into debt. Secondly, you miss out on employer benefits. Thirdly, you are the only one, on top of managing your business, who needs to manage your personal finances.

In this article, we at mymoneykarma shall help you to get your financial home in order, and will give you tips to make money by freelancing!
Track your income

The very first thing to do is to know how much you are making, or what your income is. Do you know what your income was last month or last week? Was it more or less than the previous period a year ago?

One financial expert says that freelancers have more predictable income flows than those who are not into freelancing. Most of them do not know or track their income, and feel overwhelmed when their financial situation becomes overwhelming, unmanageable and unpredictable.

On the other hand, if you do have a historic view of your income, it gets easier to prepare for the lean times of the year, especially if you have seasonal projects and repeat clients. Freelancing world can be irregular, but historic insights of your personal finance can give you some financial stability. Want to track your freelance income and expenses? Just use a separate bank account, a simple spreadsheet or a free app.
Plan to meet your tax obligations

You might be freelancing, but that doesn’t mean you can sneak away from paying your taxes. And that is one of the things which make this line or work tough by itself. It can get stressful in a hurry.

If you work in a corporate office, employers shield you from some taxes. But when you freelance, there is no such lenient shield. You’ll have to pay all your taxes yourself. But it is not so hard as it looks. Here’s what you got to do. Make an educated guess on your yearly earnings, and then make estimated quarterly payments to help you stay on track on taxes. If you can, use the previous year’s tax return as a baseline to work from.

There are, of course, things that you can deduct. These include expenses for professional development, work-related car use, and business expenses. And you can also deduct health insurance premiums, if you meet some requirements. To make sure that your tax season is smooth, learn all about the different tax rules for freelancers.
Create a budget

When you are a freelancer, budgeting may seem impossible. However, it does not have to be that way. You can use the 50/30/20 budgeting methods. In this method, 50% of your monthly income goes towards meeting your necessities post-income tax deduction, 30% towards meeting your needs, and 20% towards your savings and repaying debt.

Here are other smart things you can do:

    Stash away Rs. 50000 for emergencies.

    Save for retirement

    Pay off your bad debt first

    Don’t stop saving for emergencies

    Pay off your other debts

Get insured

Did you know that as much as 20% of freelancers are uninsured? And this is from a 2016 data. Today, with more and more freelancers joining the market, you can be rest assured that this percentage has increased. If you don’t have insurance coverage, you’ll have problems facing financial hardships in case of medical emergencies, health problems, and the like.

Here are your insurance options:

    Health insurance

    Car insurance

    Life insurance

Set competitive rates

It is always a good idea to periodically reevaluate whether or not you are compensated adequately for your efforts. According to what you find, you may need to adjust or change the price of your services. In one popular freelancing site, around half of the freelancers said they want to raise their rates the past year, and more than half opined that they planned to raise their rates the next year.

In this sense, freelancers are in a much better position. They are in control of their rates, and thus over how much they can make. This is a freedom most working people don’t have. So if you, as a freelancer, have a lot of expenses, think hard about increasing your rates.

Life Insurance vs Mutual Funds - Which Is Better?

 However, investing into the right tax saving fund is a common objective of all working individuals, yet a majority of the Indian working populace is forever confused. So, let's start from scratch by attempting to comprehend the difference between the two before determining which tax saving fund is ideal to invest in.

What are Mutual Funds?

Mutual Funds are professionally managed investments - a managed portfolio of stocks and bonds. Simply put, mutual funds are like baskets containing a diversified blend of stocks and bonds from various companies across different industries. When you purchase a mutual fund, you are basically buying one of these baskets that contains dozens (or even hundreds) of stocks from numerous companies. This is quite different from how stock market invesments work.

However, you don't get to buy a basket and lock it away for a certain period. As these are professionally managed investments, the fund managers decide what proportions of stocks your basket should store after carefully researching and predicting the market growth. They constantly shuffle the goodies in your basket to make sure that you profit from the market fluctuations. On an average, you can expect a steady annual return of at least 8% on these investments.

So, even if you are a risk-averse person, your money isn't at stake, and you can peacefully invest in these products for a long term. Tax saving mutual funds are all the more safe baits.

What are Insurances?

The Oxford English Dictionary defines insurance as "An arrangement by which a company or the state undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium." Drawing on this definition, we can define life insurance as a similar arrangement in which the insurer compensates your survivors if you die; all you need to do is pay a specific amount for a specific period.

This is the pure and unadulterated definition of life insurance, which is commonly marketed as Term Insurance. However, there are several other types of insurances that are quite complicated

What's the Problem?

The world of insurances is indeed mysterious. Investing your hard-earned money into them without adequate knowledge of what is to become of that amount is the biggest problem. Let us try to understand the complicated world of insurance in extremely simple words.

The Simple Ones

Term life insurances are pure protection products - they are available at a low cost and do not pay dividends. To put it in the simplest of words, if you purchase a term life insurance policy, you keep paying a certain premium towards the policy for a specific period - you won't get back a single penny from this policy. Your family gets a substantial fortune when you depart for your heavenly abode. A purist might not consider this a financial investment.

However, you and I can treat it as an investment in financial security as it pays a cash benefit to your family when you're not around to support them anymore. It just compensates the loss of income arising out of your death. On an average, a 30-year-old non-smoker can easily get a cover of Rs.1 crore by paying just Rs.12,000 a year. The premium amount of such policies is exempted from income tax. That's life insurance - simplified for you.

The Beguiling Ones

Insurance companies, however, have diversified their offerings and introduced several types of life insurance products which claim that they will return the premium after a specific period. Endowment Plans, ULIPs, Money Back Plans, Whole Life Plans, Annuity Plans and the likes belong to this category. These schemes have been cleverly designed by mixing insurance with investment.

The insurance companies position these products in such a way that they appear as lucrative investment options. Millions of Indians are tempted by the plethora of benefits, bonuses, coverage and a lump sum maturity amount that these policies offer. They rampantly purchase these products, not realizing that the apparently lucrative maturity value will be worth very little if inflation is accounted for.

Life Insurance vs Mutual Funds - Which Is Better?

First things first - investment and insurance simply don't mix. Mutual Funds are investments, and life insurance has barely anything to do with investments. Ironically enough, a majority of Indians consider life insurances to be safe, ideal and the best investment option. The general tendency is to keep a distance from Mutual Funds, which are regarded as "risky" investments. This attitude can be attributed to general ignorance and lack of foresight.

However, investing into the right tax saving fund is a common objective of all working individuals, yet a majority of the Indian working populace is forever confused. So, let's start from scratch by attempting to comprehend the difference between the two before determining which tax saving fund is ideal to invest in.
What are Mutual Funds?

Mutual Funds are professionally managed investments - a managed portfolio of stocks and bonds. Simply put, mutual funds are like baskets containing a diversified blend of stocks and bonds from various companies across different industries. When you purchase a mutual fund, you are basically buying one of these baskets that contains dozens (or even hundreds) of stocks from numerous companies. This is quite different from how stock market invesments work.

However, you don't get to buy a basket and lock it away for a certain period. As these are professionally managed investments, the fund managers decide what proportions of stocks your basket should store after carefully researching and predicting the market growth. They constantly shuffle the goodies in your basket to make sure that you profit from the market fluctuations. On an average, you can expect a steady annual return of at least 8% on these investments.

So, even if you are a risk-averse person, your money isn't at stake, and you can peacefully invest in these products for a long term. Tax saving mutual funds are all the more safe baits.
What are Insurances?

The Oxford English Dictionary defines insurance as "An arrangement by which a company or the state undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium." Drawing on this definition, we can define life insurance as a similar arrangement in which the insurer compensates your survivors if you die; all you need to do is pay a specific amount for a specific period.

This is the pure and unadulterated definition of life insurance, which is commonly marketed as Term Insurance. However, there are several other types of insurances that are quite complicated.

What's the Problem?

The world of insurances is indeed mysterious. Investing your hard-earned money into them without adequate knowledge of what is to become of that amount is the biggest problem. Let us try to understand the complicated world of insurance in extremely simple words.
The Simple Ones

Term life insurances are pure protection products - they are available at a low cost and do not pay dividends. To put it in the simplest of words, if you purchase a term life insurance policy, you keep paying a certain premium towards the policy for a specific period - you won't get back a single penny from this policy. Your family gets a substantial fortune when you depart for your heavenly abode. A purist might not consider this a financial investment.

However, you and I can treat it as an investment in financial security as it pays a cash benefit to your family when you're not around to support them anymore. It just compensates the loss of income arising out of your death. On an average, a 30-year-old non-smoker can easily get a cover of Rs.1 crore by paying just Rs.12,000 a year. The premium amount of such policies is exempted from income tax. That's life insurance - simplified for you.
The Beguiling Ones

Insurance companies, however, have diversified their offerings and introduced several types of life insurance products which claim that they will return the premium after a specific period. Endowment Plans, ULIPs, Money Back Plans, Whole Life Plans, Annuity Plans and the likes belong to this category. These schemes have been cleverly designed by mixing insurance with investment.

The insurance companies position these products in such a way that they appear as lucrative investment options. Millions of Indians are tempted by the plethora of benefits, bonuses, coverage and a lump sum maturity amount that these policies offer. They rampantly purchase these products, not realizing that the apparently lucrative maturity value will be worth very little if inflation is accounted for.
The Dilemma

Let's try to understand how these insurance-cum-investment products work. Well, it's true that the hybrid insurance policies offer insurance coverage and simultaneously allow you to capitalize on various investment instruments like stocks, bonds and mutual funds. Let's say you decide to invest Rs.50,000 into an insurance-investment hybrid product. As insurances are meant to provide death benefits, a chunk of the invested amount is directed towards the life cover.

Let's assume that Rs.10,000 goes towards life coverage, and you don't earn a penny on this amount. The remaining Rs.40,000 becomes your investment. Alternatively, you can buy a term insurance policy with Rs.10,000 out of Rs.50,000 and invest the remainder in mutual funds. What difference does it make?

Most importantly, the hybrid insurance plans pay you round 5-6% return on the invested amount, which is much lesser than the minimum returns of 8% that you can expect from mutual funds. The hybrid insurances don't let your entire money grow. Moreover, term insurances generally insure you for much more than ULIPs and Endowments plans do.

People looking for life insurances undoubtedly want to leave a substantial corpus for their beneficiaries - the hybrid policies do not provide as high a death benefit as term life insurances do. It makes more sense to invest in a mutual fund to grow your money and enjoy it while you live; simultaneously, purchase a term life insurance for your family's future needs. That would be a better and smarter financial move.