Is Life Insurance Better Than an ELSS?
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Life insurance is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of an insured person. Depending on the contract, other events such as terminal illness or critical illness can also trigger payment.
Equity Linked Savings Scheme (ELSS) is a kind of mutual fund scheme that predominantly invests in equity and equity related instruments to generate high returns. What makes ELSS different from other equity mutual fund schemes is that investment upto ₹1.5 lakh in ELSS is eligible for deduction from taxable income in a financial year. The scheme comes with a statutory lock-in period of 3 years for each SIP. It is the only mutual fund scheme that qualifies for tax deduction under Section 80(C) of the IT Act.
Important Benefits Of Life Insurance Policy
Here are some common uses of life insurance benefits:
Certainty
Once a goal has been identified and a value for it has been crystallized, a life insurance policy is an excellent vehicle to fund the goal. This is because one can be rest assured that even in the unfortunate event of death or even critical illness, the sum assured will fund a future goal of the policyholder.
Tax efficient
Maturity benefits of most insurance policies are tax free under Section 10 (10D) and the premium paid is eligible for deduction under Section 80C of the Income Tax Act, 1961.
Flexibility
Insurance products, especially Unit Linked Plans, provide flexibility in terms of asset allocation to suit specific risk appetites, policy durations, premium payment terms and fund switching options.
Wider options
Depending on the time horizon of the goal, the return required and the investor's risk appetite, a broad spectrum of asset allocations between equity and debt is possible in a Unit Linked Plan. An investor may tailor his policy to suit his requirement.
Liquidity
Most Insurance products offer good liquidity after the lock-in period to take care of any emergency requirement of funds. But they do have inherent deterrents in the form of charges to discourage unnecessary encashment.
Earmarking
Very often an insurance policy is taken for a specific goal. This therefore can become a deterrent against utilizing these funds for any other purpose and also encourages continued contributions.
Insurance for Financial Security
Insurance helps you to provide for contingent liabilities like hospitalization, critical illness, debt redemption, etc. in a cost efficient manner.
Benefits of Investing in ELSS
High Returns
Since Equity Linked Savings Scheme is essentially an equity scheme, it has the potential to deliver exponential returns in the long run. Although risky, investment in ELSS has the potential to deliver significantly higher returns when compared to traditional tax saving instruments. Moreover, ELSS has the lowest lock-in period amongst all other tax saving avenues.
Tax Exemption
If your mutual fund savings offers tax saving opportunities, along with high investment growth, what more can you ask for. ELSS allows you to save taxes, as investment upto ₹1.5 lakh in these schemes is eligible for tax exemption.
Diversification
Investment portfolio of ELSS consists of balanced allocation to different asset classes such as equity and debt securities. Besides this, numerous funds diversify within the equity category as well, allocating assets to large cap, mid cap, small cap equity stocks. Via ELSS, one can easily diversify their overall investment portfolio and effectively mitigate market risk.
Professional Management of Investment
As the investment portfolio is managed by professional experts who are well-informed about the market sentiment and functioning of capital markets, the investors’ money is in safe hands. Even if you don’t have much knowledge about the working of financial markets or lack time to track the market, you can still capitalize the returns from equity markets, via investment in ELSS.
Disciplined Investment
Investment in ELSS requires a minimum lock-in of 3 years, which instills investment discipline amongst consumers. For a more efficient disciplined investment approach, you can also invest via Systematic Investment Plan (SIP) in ELSS, which requires periodic installments in the fund on predetermined dates. However, it should be noted that each SIP installment remains locked-in for 3 years.
Conclusion
Life insurance can be a sensitive topic, but it can help provide a more secure financial future for your family if the unexpected happens. Contacting an insurance agent can help you better understand the types of life insurance and determine what kind of policy fits you and your family's needs. ELSS is a conventional mode of investment that requires an investor to fill a form and submit it at the nearby branch of the fund house, or invest through a broker.
