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Life Insurance Savings Plan 101

So you’re thinking of availing of a life insurance savings plan – congratulations! You’re one step closer to achieving further financial stability! But what is a life insurance plan in the first place?

A life insurance savings plan can benefit you while you’re alive (contrary to popular belief) and assist your family after you’ve passed. However, do you know how it works? Its risks and costs?

To help you, here’s a primer on life insurance savings plans.


What is a life insurance savings plan?

Long story short, life insurance savings plan is a regular savings plan with life insurance. You put away a certain amount of money each month and put it into a savings and investment fund for a fixed period of time.

It is often called an “endowment policy” or “tax-exempt savings plan”.

When you pass, your dependent will receive a tax-free lump sum payment that can help them manage without you. This is very important especially if you’re the sole or primary breadwinner in the family. However, the amount they receive isn’t fixed which will be explained below.

How does a life insurance savings plan work?

With this type of plan, you’ll first need to set a time frame or the set time you’ll save your money. Typically, experts advise a minimum of 10 years. Once you’ve got this down, you’ll need to start making regular payments, usually monthly and through direct debit.

The money you invest will be divided between a contribution towards your life insurance coverage and funds you invest in.

The company you buy your plan from may invest your money into a portfolio of investments like shares, bonds, and property, depending on your risk profile. Bonds are low-risk but with also low rewards while equity shares are high-risk with high rewards.

You may also choose where to invest your money. You can choose between a ‘with-profits’ basis where the insurance company decides where to invest your money, and ‘unit-linked’ wherein you decide for yourself.

Either way, whatever it earns will be included in the lump sum payout.

What are the risks?

All types of investments have their own set of risks because it’s dependent on the market and other factors. However, life insurance saving plans, at least offer a guaranteed minimum payment at the end of the term.

The insurance company will look after your money. The only major problem that could arise is the rare event when the company goes under, or if the market crashes and you have availed the unit-linked plan.

Best consult with your financial advisor before making any form of financial investment.

How can one take out a life cover with a savings plan included?

How can you start with this type of plan?

You can easily check out the many insurance companies that offer this type of plan. Once you choose the company that best suits your lifestyle, they will assess your application before giving you a plan that considers:

– Your age
– Length of the investment term
– Your state of health, and
– Other lifestyle factors (smoking, drinking, etc.)

Once you are clear on the benefits of the policy you’re interested in, an advisor will work to find you the most competitively priced policy on your behalf.

Are there any other costs involving this type of plan?

The easy answer is yes.

Usually, other costs include:

– Administration fees
– Charges for bonuses during your contract term
– Switching fees, some sort of penalty fee you need to pay if you decide to change where your money is invested in.
– Exit charges. This applies if you decide to end your policy before your contract is up.

At the end of the day, if you’re looking for a plan that combines savings and life insurance coverage, availing of a life insurance savings plan is a good idea. However, it’s always best to speak with a financial advisor to walk you through the pros and cons of each plan. After all, financial decisions should not be taken lightly.

Photo Credits:
Photo by Julian Jagtenberg from Pexels
Photo by Alexander Mils on Unsplash
Photo by Priscilla Du Preez on Unsplash

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