Secure and Grow: Pure Term Plans + MF Combo for Your Future

Don’t fall for the traditional insurance policies trap! Learn how to make informed decisions by combining pure-term plans and mutual funds. With the new taxation proposal taking effect in April 2023, this guide will assist you in choosing the best investment + insurance combo to help save your tax in obtaining better coverage and higher returns.

Changes taking place from 1st April

The Indian insurance market is in turmoil due to the new taxation proposal that will affect traditional insurance policies. 

From April 1, 2023, maturity proceeds of all life insurance policies (other than unit-linked insurance policies or ULIPs) that are issued after April 1, 2023, and have an annual premium of more than Rs 5 Lakh will now be taxable. making these policies even less attractive than before. 

Now is the time for smart investors who want adequate coverage and long-term returns. Here’s how to combine insurance with investment options.

USPs of the Combination of Term plan and Mutual Funds

The combination of a term plan and mutual funds can offer the following:

  1. Tax benefits: Both term plans and mutual funds offer tax benefits. The premium paid towards a term plan is eligible for tax deduction under section 80C of the Income Tax Act. Similarly, investments in equity-linked savings schemes (ELSS) of mutual funds are eligible for tax deduction under section 80C.
  2. Comprehensive financial protection: By combining a term plan with mutual funds, the policyholder can also create a corpus that can provide financial stability to the family even during his/her lifetime.
  3. Long-term wealth creation: By investing in mutual funds, the policyholder can create a long-term wealth corpus that can be used to meet various financial goals such as children’s education, marriage, retirement, etc.
  4. Flexibility and liquidity: The policyholder can choose to invest in mutual funds as per his/her risk appetite and financial goals. Also, mutual funds provide liquidity, which means the policyholder can easily redeem the units as and when required.
  5. Cost-effectiveness: By combining a term plan with mutual funds, the policyholder can save on the high charges associated with unit-linked insurance plans ULIPs.

The winning formula is a combination of pure-term insurance plans and mutual funds. Mixing insurance and investment often results in low returns and inadequate coverage, so it’s essential to opt for a simple term life insurance plan and invest the remaining balance in mutual funds.

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Consider the following example:

A 30-year-old purchasing a popular LIC New Jeevan Anand plan with a 20-year tenure and a Rs 1 crore cover will be required to pay a yearly premium of Rs 5.7 lakh. Assuming tax-free status and 5% returns at maturity, the amount available would be Rs 1.98 crores. 

In comparison, an annual premium of around Rs 11,000 is required for a term plan like LIC New Tech Term for a 30-year-old with a 20-year tenure for a cover of Rs 1 crore. The remaining Rs 5.59 lakh can be invested in mutual funds with 10-per cent average returns, accumulating to approximately Rs 3.52 crore over a 20-year period.

Even after adjusting for LTCG (Long-term Capital Gain) tax, the returns from a combination of a pure-term plan and mutual funds are much higher than traditional insurance policies. 

To sum up, this guide has provided valuable insights and recommendations on effectively managing the upcoming taxation proposal in India from April 1, 2023.



Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.