Insurance In India: An Investment Or A Safety Net?

India's insurance industry is critical to the country's economic development, providing security in the event of unforeseen incidents and supporting family members in the case of loss of life or health issues. The sector has witnessed impressive growth over the last two decades, driven by greater private sector participation, improved distribution capabilities, and operational efficiencies. As of 2022, India's insurance premium volume stood at $131 billion, with the market expected to reach $200 billion by 2027. The country has 73 insurers, including life, general, health, and reinsurers. The insurance density and penetration have also increased over the years, with the life insurance sector's penetration doubling from 2.2% in FY02 to 3% in FY23. The industry's growth is expected to continue, with premiums projected to grow by an average of 9% per annum over the next decade. This text will discuss the topic 'Is insurance an investment in India?' by examining the country's insurance industry, the types of insurance products available, and their potential as investment options.

Unit-Linked Insurance Plans (ULIPs)

• Dual Benefit: ULIPs offer the dual advantage of insurance and investment. A portion of your premium ensures you're covered with life insurance, while the other part is invested in various funds of your choice.
• Flexibility to Switch Funds: ULIPs allow you to switch between different ULIP funds based on your investment objectives and risk tolerance. You can choose to invest in equity, debt, or a combination of both, depending on your risk appetite and goals.
• Protecting Your Child's Future: Child ULIP plans come with a "Waiver of Premium" feature, which ensures that your policy remains active and future premiums are waived off in the event of your disability, critical illness, or death.
• Long-Term Investment: ULIPs have a 5-year lock-in period, encouraging long-term investment and financial discipline.
• Liquidity: After the initial 5-year lock-in period, you can make partial withdrawals to meet financial needs.
• Tax Benefits: Investing in ULIPs can provide tax deductions under Section 80C of the Income Tax Act, and the maturity proceeds are typically tax-free.

When choosing a ULIP, it's important to consider your long-term financial goals, investment horizon, and risk tolerance. New-age ULIPs offer lower charges, greater flexibility, and enhanced transparency compared to traditional ULIPs, making them a cost-effective and attractive investment option.

Insurance-cum-investment plans

Guaranteed Return Plans

These plans offer a safer investment avenue with guaranteed returns, making them attractive to investors who are averse to market volatility. New-age guaranteed return plans can offer higher returns, typically ranging from 7% to 7.5%, depending on the investor's profile. The rate is fixed and unaffected by market conditions. Policyholders can lock in their funds for the long term (40-45 years) or opt for shorter-term investments with a minimum of five years. These plans are a viable alternative to traditional options like fixed deposits, national savings certificates, or public provident funds, as they offer higher returns that are often tax-free. They are well-suited for meeting life goals such as a child's education or marriage. Additionally, for high-net-worth individuals, investing a substantial amount monthly over a few years can result in a substantial corpus due to the competitive, inflation-beating rate of return.

Unit-Linked Insurance Plans (ULIPs)

ULIPs are market-linked instruments that combine insurance and investment. They cater to investors seeking both security and fund growth. ULIPs offer a life insurance cover, and the returns can vary depending on market conditions. Investors can allocate their funds between equity and debt, allowing for a certain level of flexibility. ULIPs also provide tax benefits at the time of premium payment and maturity due to the life insurance component. However, for policies purchased after February 1, 2021, with annual premiums exceeding INR 2.5 lakh, long-term capital gains tax will apply. ULIPs typically have a lock-in period of three to five years, but for optimal benefits, longer investment horizons of 10-15 years are recommended.

Capital Guarantee Solutions

Capital guarantee solutions are designed for moderate risk-takers who want to balance market upside with a traditional investment approach. These plans are a hybrid of guaranteed return plans and ULIPs, with 50-60% of the fund amount invested in guaranteed return plans and the remainder in equity. The principal amount is secure, and investors can benefit from the potential upside of the market while also enjoying consistent returns from the guaranteed portion.

Annuity Plans

Annuity plans are ideal for retirement planning, offering the flexibility to invest as much as desired without the reinvestment risk associated with pension schemes. These plans can provide a rate of return of up to 6.5%, depending on the policyholder's profile, and the interest rate remains locked for the entire policy tenure. Annuities can be immediate, where a lump sum amount is invested, and pension payouts begin as early as the following month, or deferred, where payouts start after a specified deferment period. Annuity plans are eligible for tax deductions under specific sections of the Income Tax Act.

Public Provident Fund (PPF)

The Public Provident Fund (PPF) is a long-term investment scheme that is ideal for individuals with a low-risk appetite. Introduced in India in 1968, the scheme is mandated by the government, offering guaranteed returns to protect the financial needs of the masses in India. The funds are not market-linked, providing stable returns on investment annually.

Features of a PPF Account

PPF accounts have a lock-in period of 15 years, which can be extended in blocks of 5 years. The minimum investment amount is Rs. 500, while the maximum is Rs. 1.5 lakh per financial year. The interest rate for 2024 is 7.1% p.a., compounded annually. The interest and maturity amount are tax-free under Section 80C of the Income Tax Act, 1961.

Eligibility Criteria

Indian citizens residing in the country, including minors, are eligible to open a PPF account. Non-residential Indians (NRIs) cannot open new accounts but can continue contributing to existing ones.

Benefits of PPF

PPF accounts provide the benefit of availing loans against the investment amount. Loans can be taken between the third and sixth years of the account's activation, with a maximum tenure of 36 months and a limit of 25% of the total amount available in the account.

Opening a PPF Account

PPF accounts can be opened with either a post office or authorised banks, such as ICICI, HDFC, Axis Bank, and State Bank of India. The process can be completed online or offline, requiring documents such as a filled application form, KYC documents, residential address proof, a nominee declaration form, and a passport-size photograph.

Equity Linked Savings Schemes (ELSS)

ELSS funds are a good investment option for those looking to save taxes. Here are some of the key features and benefits of ELSS funds:

Features of ELSS Mutual Funds:

• A minimum of 80% of the total investable corpus is invested in equity and equity-related instruments.
• The fund invests in equity in a diversified manner across different market capitalizations, themes, and sectors.
• There is no maximum tenure of investment. However, there is a lock-in period of three years.
• Tax exemption on the invested amount under Section 80C of the Income Tax Act.
• Income is treated as Long-Term Capital Gain (LTCG) and taxed according to the prevalent tax rules.

Benefits of Investing in ELSS Mutual Funds:

• Tax Deductions and Wealth Accumulation: ELSS funds offer the dual benefit of tax deductions and wealth accumulation over time. You can claim a tax rebate of up to Rs. 1,50,000 and save up to Rs. 46,800 a year in taxes.
• Shortest Lock-in Period: ELSS funds have a lock-in period of just three years, the shortest among all tax-saving investments.
• Option to Invest Small Amounts: You can invest as low as Rs. 100 a month through Systematic Investment Plans (SIP).
• High Returns: ELSS funds have the potential to offer higher returns compared to other tax-saving options like fixed deposits or public provident funds, especially when the markets are on a bullish trend.

How to Invest in ELSS Funds:

You can invest in ELSS funds through online mutual fund investment platforms or through an existing demat account.

Taxation Rules for ELSS Funds:

ELSS funds are locked in for three years, so you can only realize long-term capital gains. These gains are tax-free up to Rs. 1 lakh per year, and any earnings beyond this amount are subject to a 10% long-term capital gains tax.

National Savings Certificate (NSC)

The National Savings Certificate (NSC) is a fixed-income investment scheme offered by the Government of India through post offices, providing assured returns and tax benefits under Section 80C. Individuals with Indian citizenship and aged 10 years or above can invest. The NSC has a 7.7% interest rate and a five-year lock-in period. The scheme is not open to Hindu Undivided Families (HUFs), trusts, non-resident Indians (NRIs), or companies. It offers capital protection and tax-saving benefits.

Features and Benefits of NSC

• Interest rates: The certificates earn a fixed annual interest rate, which is revised quarterly by the government, thus guaranteeing a regular income for the investor.
• Maturity period: The scheme originally offered two types of certificates: NSC VIII Issue (5-year tenure) and NSC IX Issue (10-year tenure). However, the latter was discontinued in December 2015, leaving only the former available for subscription.
• Tax saver: As a government-backed tax-saving scheme, the principal invested in NSC qualifies for tax savings under Section 80C of the Income Tax Act, up to Rs. 1.5 lakh annually.
• Investment flexibility: The minimum initial investment is as low as Rs. 100, with no maximum limit.
• Accessibility: NSCs can be easily purchased from any post office by submitting the required KYC documents. The certificates can also be easily transferred between post offices and individuals without affecting interest accrual or the maturity of the original certificate.
• Loan collaterals: NSC certificates are accepted as collateral or security for secured loans in banks and non-banking financial companies (NBFCs).
• Power of compounding: Interest earned is compounded annually and reinvested by default, but it is only payable at maturity.
• Nomination: The investor can nominate any family member, including a minor, to inherit the NSC in the event of their death.
• Corpus on maturity: The investor receives the entire corpus value upon maturity. Since there is no Tax Deducted at Source (TDS) on NSC payouts, the subscriber must pay the applicable tax when filing their income tax returns or advance tax.
• Premature withdrawal: Early exit from the scheme is generally not permitted, except in cases of the investor's death, a court order, or forfeiture by a Gazetted Government Officer.

Who Should Invest in NSC?

The NSC offers guaranteed interest and complete capital protection, similar to other fixed-income instruments like the Public Provident Fund and Post Office Fixed Deposits (FDs). However, it may not deliver inflation-beating returns compared to tax-saving mutual funds and the National Pension System. The government promotes the NSC as a savings scheme for Indian individual citizens.

Frequently asked questions