When it comes to portfolio diversification, the spotlight is often on stocks, bonds, mutual funds, gold, the Public Provident Fund (PPF), the Employees’ Provident Fund (EPF) and other similar instruments. But what about Life Insurance? Beyond just providing financial security, life insurance can be a strategic tool for wealth creation, risk management, and even market linked growth. From pure protection with term plans to investment driven ULIPs and guaranteed savings plans, life insurance offers a unique way to balance risks and returns in your portfolio.
Let’s understand how you can have a well-diversified portfolio with life insurance.
1. Life insurance offers assured payouts
Life insurance provides assured payouts, which offers a sense of certainty that other investment options cannot always match. In the unfortunate event of your demise, life insurance provides a guaranteed payout to your family members as long as the premiums are paid, the policy is active, and the claim adheres to the terms and conditions. This certainty makes life insurance unique compared to other investment options.
Life insurance ensures your family’s financial security even when other investments may fail to deliver. It guarantees that your loved ones will have the resources they need to cover essential expenses, maintain their standard of living and fulfil future financial goals, regardless of how your other investments perform.
2. Life insurance offers market-linked and non-linked options
In addition to protecting your family, life insurance provides both market-linked and non-linked plans catering to different financial goals and risk appetites.
If you are looking to participate in the market, you can consider life insurance options like Unit Linked Insurance Plans (ULIPs). These plans offer life coverage along with investments in equity, debt or hybrid funds, allowing you to benefit from market growth while staying protected. On the other hand, if you prefer stability and non-market-linked growth, life insurance offers options like term insurance for basic protection, whole life insurance for lifelong coverage and endowment or guaranteed income plans for assured and fixed returns.
This range of choices makes life insurance uniquely versatile. You can consider ULIPs to diversify your portfolio if you are aiming for higher returns through market participation, while endowment or guaranteed income plans are ideal if you are seeking reliable, steady growth. Incorporating these options into your financial strategy ensures you create a well-rounded portfolio that balances not only growth and stability but also protection.
3. Life insurance offers tax diversification
Tax diversification is often an overlooked aspect of investment planning. While diversifying for returns and risk is crucial, it is equally important to consider the tax implications of your portfolio. If all your investments are heavily taxed, it can significantly reduce the value of your returns. It is essential to add some tax-friendly options to balance out your tax output. Life insurance can be the ideal way to diversify your portfolio for tax.
Life insurance premiums qualify for a tax deduction of up to ₹ 1.5 lakh per annum under Section 80C of The Income Tax Act, 1961. You can lower your taxable income in the year you pay premiums and reduce your tax liability. Since life insurance is typically a long-term commitment, this benefit can be availed year after year.
Additionally, the death benefit paid to your family in the term plan and the maturity amount (returns) in ULIP or savings plan are tax-free subject to conditions under Section 10(10D) of The Income Tax Act, 1961. Unlike other investment returns, which may be subject to capital gains tax, this payout ensures your loved ones receive the full benefit without any tax deductions.
If you enhance your life insurance with health riders, such as critical illness coverage, you can claim an additional tax deduction of up to ₹ 25,000 or ₹ 50,000 per annum for senior citizens under Section 80D of The Income Tax Act, 1961. This further reduces your tax outflow.
To sum it up
Life insurance isn’t just about protection – it’s a powerful diversification tool. By integrating it into your portfolio, you ensure both financial security and wealth-building potential.
