Insurance for Investment and Loans
Investment in insurance products is very popular especially as a Tax Saving option. Salesmen across companies promise everything up to the moon and highlighted focus is on good returns with life coverage. The options are virtually unlimited with bonds, stocks and many other asset classes included into the investment horizon. Thus, one need not worry in case you face a funds crunch as there is always an option to avail a loan on your policy based on the latest surrender value.
How Insurance Works
Let us first understand the purpose of insurances and the methodology adopted in computing the costs. The purpose of insurances primarily is to provide security and any insurance. Products with investment features will have two constituents. This is namely the insurance component and the investment component. Whenever we purchase any insurances for the purpose of investment some charge towards payment of insurance cover are deducted upfront. The remaining amount is then invested for generation of returns. Since investment are more in the nature of income generation in the long term their investment strategy differs from that adopted by mutual funds. This thereby limits growth potential especially in the short term.
Insurance and Loans
Availing loans on the surrender value of insurance policies is also not simple as most of the insurances are purchased for the purpose of saving tax and therefore there is a lock in period before which loans cannot be availed also loans if offered are only made available for up to 80% of the surrender value thereby reducing the quantum of finance available secondly if the surrender value of your policy is less at the time of requiring loans due to adverse market movement then the loan available might be very less. This situation could have been avoided had one made direct investments in mutual funds, stocks and bonds instead of purchasing insurances.
Insurances as a means of protection has a specific purpose and is necessary for everyone. However, as a means of investment and loans, insurance policies are probably overrated. Also, loans on insurances may come at a higher rate of interest and are mostly only provided by the banks that have tie up with that insurance company. Any direct investment could also get you loans and the insurance coverage could be purchased separately. This includes stocks, mutual funds or bonds. Therefore one should avoid purchasing insurances for the sake of investment and to take loans on those policies later.
For more information on loans and investments, feel free to come talk to us, or drop us a message with your queries! As the Best Licensed Money Lender Singapore, we can provide you with any advice you may need.