What are the things you must compare before planning for investments?
There are different options to invest and not necessarily all of them can fulfill the basic objective of an investor to invest. To know more about this, it is always good to compare before you can purchase. When we are comparing we need to look at a few things:
Cover: The coverage that is offered is a good indication of which products are better as compared to the others. The better scheme will always offer the most comprehensive and yet practical coverage. Though most of the schemes offer similar options to save, some of them may offer increased cover if the ULIPs reach a certain milestone or may offer the same cover at a lower premium. Also, with the IRDA keeping a strict vigil on the insurance market, most insurance providers now focus on ULIPs as long-term products unlike before when they were mostly sold by unscrupulous agents as short-term options to invest. This means that companies now are more likely to offer better cover than before as the investors are buying the policy for the longer tenure instead of looking at it like a short-term plan.
Add-On Covers and Riders: A good financial product offers extra covers and riders at significant discounts. These add-on riders may include increased life cover for a smaller premium additions, cover for parents or larger number of family members, health cover, timely health checkups, and so on. These rider addons, though not always a feasible option, may offer the specific cover that a person may be seeking. For Instance, some riders may include personal accident cover, and child cover, among others. All of these are available at a discount as compared to what taking one of them as a single unit plan may come up to in terms of premiums. An investor can opt for the add-on covers or riders that suit their needs.
Flexibility to Change Cover: Some options allow the insured individual to increase or even decrease their cover during the policy tenure. This is essential as the cover needs vary according to your age and responsibilities. During your early years, the cover can be less but it has to increase as your expenditure and responsibilities grow with age. This is because the investing amount should be able to cover for any loss of income without the need to make any major changes to your lifestyle. A good plan will let you increase or decrease your cover according to your needs.
Insurance Premium: Though most of premiums of the assured amount are similar, extra fees and charges may affect the benefits on the investing funds. Endowments, as a rule, are costlier than ULIPs due to the guaranteed profits they offer. Some things to look out for include what part of the premium is used for investing. Some ULIPs may load more of their costs during their initial years while others may spread them over a few years. This means that the sum allocated to the ULIP is less in the initial years. This affects the returns as higher the initial investments, the higher the long-term benefits.
Option to Increase or Decrease Premium: A good plan will offer the option to increase or decrease your premium depending on your payment capabilities. Some may offer top up covers that let you increase your cover on payment of extra premiums. This is a good option to have as you may want to pay a higher premium to gain higher profits when you can and then reduce your premium when you have other responsibilities where you need to put your fund.
Returns: In most cases, the profits offered are a good way to understand which option is better. For one thing, there are two types, the market linked ULIPs whose benefits are dependent on the market and may offer higher profits, and the endowment options that offer sure profits but on the lower side. Another point to note is that the profits in endowment choices only come after a few years while in the case of ULIPs, the insured can make complete withdrawals once the lock in period has expired. A good way to understand which plan is better is to understand your requirements. If you prefer sure but safe profits, then endowment options are ideal. Alternatively, if you are comfortable with the higher risk for the higher profit, then the ULIPs are best for your needs.
Type of Payouts: Different savings options offer different types of returns. For instance, some may offer a single payment while others may offer an annuity while others may offer a bit of both. The choice of returns will depend on a few things – the goal for which the fund is put into the product is being made, the time for which the fund is invested will be made, the type of return desired, etc. In case, the scheme is being chosen for a specific goal such as childs education or a dream house or retirement, then the type of profits desired will vary. For instance, in case of child plans it will be better to receive annuities over a few years that will cover graduate and post-graduate costs whether in India or abroad. For retirement, it is better to receive a single payment near retirement to cover any relocation or other costs and then receive monthly payouts that serve as regularized monthly returns. What option of payouts you choose will depend on your expectations of your needs.
Fund Options Available: ULIPs invest into funds that are linked to various units – whether trading on the market of otherwise. For instance, some ULIPs may offer near guaranteed profits that are on the lower side as compared to market-linked funds that offer riskier but higher returns. The lower near guaranteed ULIPs invest in non-risky debt securities and savings options and are thus able to protect your capital from market volatility. Most companies offer choice of fund that may sometimes depend on your age bracket. Some may offer a choice of debt and equity market fund with an equal proportion of your funds (50:50) invested in each type of fund units or slightly skewed in favor of debt or equity (say 70:30). Most experts suggest taking a higher exposure to fund market at a younger age and then slowly moving to debt as you age, so that by the time you retire all your money is in debt funds. Such a strategy works better as you are exposed to the market risks at a younger age when you can recover from any downswing, and this risk decreases with age as your responsibilities increase. Moreover, the corpus you have built up remains safe from the vagaries of the market. Consequently, the funds available are an important thing to check before making your choice.
Flexibility to Change: Insurance companies allow the insured party to change the amount of their funds for investing into the funds of their choice. This is especially good as the of savings increase over the years and investors have the option to considerably grow their asset base. The increase in the investing amount is generally accompanied by a corresponding increase in the life cover, though the increase in the cover may not be proportional as the focus is more on the growth of fund.
Alternative Investment and Insurance Options: An important thing to check and decide if you should invest in a good financial product. This works well if you already have some sort of cover gives coverage or a term plan. In such cases, investors can use their funds for investing into mutual funds, which even though they may not provide coverage, are likely to offer better returns. However, if you do not have a choice for investing into market and are looking for policies that gives returns and coverage then are the best options for you to put your money into. You can use an endowment schemes as a backup for definite profits and ULIPs for other goals such as a house, car, retirement, foreign travel and childs education, among others.
Insurance Premium Payment Options: Most funds give you the option to make monthly, quarterly, half yearly or annual payments. In certain instances, the quarterly, half yearly or annual options make sense as the payment outgo may be less since the companies may offer a discount due to the lesser paperwork involved. However, the premium are generally high and as such only makes sense when you have enough funds to pay the premiums due. If you are starting out on your career or do not have the necessary schemes to make a single premium payment, then the monthly payments make better sense. There are products that have the option to change the periodicity of the premium payment for certain policies. You can begin with the monthly or quarterly payment options at the policy inception and then switch to the semi-annual or yearly payments in the later years.
Tax Benefits: The premiums of these policies are exempted under the Tax Act up to the prescribed limits. This means that when you make any premium payment for the policies you have, you can claim deduction of the amount thus advanced from your total earnings. For instance, suppose you are investing Rs. 50,000 annually in life coverage options from your annual income of Rs. 4 lakh. In this case, while calculating your income tax, you can deduct Rs. 50,000 under section 80C of the Indian Tax Act. Only the remaining amount, Rs. 3.5 lakh will be liable to taxation, provided there are no other exemptions available. The payout from these policies qualifies for exemption under section 10(10D) of the Income Tax Act.