Nurturing Your Life Insurance

In a world where more and more could be done in an instant, be it instant coffee, instant delivery of online grocery and food orders, instant money transfers and so on, it is easy to forget that many important things still require substantial time. When it comes to saving for important future needs like child’s higher education and retirement that require substantial amounts of money, you need years of regular savings.

Why life insurance plans need long-term nurturing? Many of us will liken making investments to nurturing plants that eventually grow into fruit- and shade-bearing trees. For trees to provide shade and fruits, it takes years of growth. Saving for your family’s future with the help of a life insurance plan is no different. Just as a growing tree provides protection from sun and rain, so also your family gets the life insurance protection in your absence. Additionally, just as trees need constant watering and nourishment over a period of time to grow and bear fruits, similarly you need to stay invested in your life insurance plan and make regular premium payments so as to meet your financial goals at the end of the policy term. 

Benefits of staying invested in your life insurance plan - For market linked plans, such as Unit Linked Insurance Plans (ULIPs), to begin with, you get the benefit of life insurance protection. This life insurance protection not only helps your family meet regular expenses in case of your unfortunate absence, but also helps to meet major financial goals like your child’s higher education. ULIP policyholders also get the freedom to invest their money according to their risk appetite. They can invest in a mix of lower-risk debt funds and higher-risk equity funds in a proportion that they are comfortable with. So, while a person with a lower risk appetite might have a greater preference for debt funds, those seeking higher returns would prefer more of equity funds. Since equity typically provides high growth in the long term i.e. 8-10 years or more, by staying invested in life insurance plan like ULIPs, you typically manage to get the high long-term growth and see off short-term market fluctuations. Of course, one can get the benefits of investing in a mix of equity and debt by paying premium regularly and staying invested. 

The other advantage of staying invested is that you get the benefit of compounded growth. Thanks to compounded growth of regular investments, ever-growing accumulated savings experience growth eventually resulting in ample savings for various needs. However, you stop getting the benefit of compounding if you make a premature exit from your life insurance plan. Worse, as with premature exit from any investment, you need larger regular investments in the future to make up for lost time since your investments are typically earmarked for future needs like child’s higher education. Let’s take a simple example of loss of compounded growth on premature exit.

Cost of premature exit - If you need Rs. 10 lakh for your child’s higher education after 15 years, you will need to save Rs. 3,090 monthly if your money grows at a net growth of 7% annually. If you make a premature exit at the end of the fifth year and even if you re-start investing immediately without utilising the amount received for the designated purpose, then you will need to invest a significantly higher amount of Rs. 5,651 per month assuming the net growth is 7%, in order to reach your original target of Rs. 10 lakh. The loss of momentum in the compounding process also leads to an immediate loss in returns which needs to be compensated by a higher amount of regular investment. Given the loss of long term growth and lesser time at hand to save money for your financial goals, not to mention lower life insurance protection, there is a compelling case for you to stay invested in your lifeinsurance plans. Our ancient texts refer to Kalpavriksha, the divine tree that fulfils all your wishes and needs. While life insurance plans are obviously not in the same league, they still have remarkable similarities having the capacity to fulfil your needs for financial protection and meet your future financial goals. Of course, the key is for you to nurture the tree over the years so that it can serve you in your hour of need.