Life insurance policies offer financial security to beneficiaries when the insured is not around anymore. In exchange for premium payments, the insurance company provides a lump-sum payment to beneficiaries upon the insured's death. Apart from this financial protection, customers can also use these policies to build a savings pool.
This can be done by investing in participating life insurance products, which is also known as 'with-profit' policies.
Participating life insurance products allows customers to participate in the profits generated by the participating policyholder’s funds.
The profits made by the insurer are shared with the insured policyholders in the form of annual bonuses which are added to the guaranteed maturity benefits of policyholders.
“Participating products by nature have a fair amount of security which comes as built in. A larger proportion of the premium is invested in fixed income portfolio. It is also mandated by the regulator to have a conservative approach,” explains Amit Palta, Chief Distribution Officer, ICICI Prudential Life Insurance.
“Capital protection is built in and bonuses are added to the guaranteed maturity benefit,” he adds.
However, higher premium charges of participating products may confuse some customers if they should go for it.
On this, Palta says since a lot of the charges are upfront it appears to be high initially, bonuses and other incentives added over a period of time offset these higher initial charges.
“Customers should also understand that life insurance savings products are to be purchased with an aim to build long term savings and not for the short term. The longer one stays with the policy, cheaper it becomes,” Palta adds.
Insurance companies also offer annuity plans that offer low risk and a regular income.
“These plans help in accumulating surplus over a certain period, which can be used to generate income. Somebody who has invested 1 lakh for 20 years would have accumulated a decent surplus to generate income. Additionally, customers can use the systematic withdrawal option in policies to earn income at fixed intervals,” he further suggests.