Always look out for this hidden feature while investing in life insurance!

Life insurance is a financial protection plan for a contingency involving human life, such as death, disability, accident, or retirement. The risk of death and disability threatens human life as a result of natural and unnatural causes. When human life is lost, or a person is permanently or temporarily disabled, the household suffers a loss of income.

Though human life cannot be valued, a monetary amount based on future income loss could be calculated. As a result, the Sum Assured (or the amount guaranteed to be paid in the event of a loss) in life insurance is a ‘benefit.’ Life insurance policies pay out a set amount of money if the life insured dies or becomes disabled as a result of an accident during the policy’s term.

What is Life Insurance?

Life insurance is a legally binding contract between two parties: the insurance company (insurer) and the individual (insured). The insurance company promises to make good the insured’s losses if the insured contingency occurs.

The event that causes a loss is referred to as a contingency. It could be the policyholder’s death or property damage/destruction. Because the event’s occurrence is uncertain, it is referred to as a contingency. In exchange for the insurer’s promise, the insured pays a premium.

How Does Life Insurance Work?

The insurer and the insured enter into a legal contract for insurance, known as the insurance policy. The life insurance policy specifies the terms and conditions under which the insurance company will pay out the life insurance amount to either the insured or the nominees.

Insurance is a means of shielding yourself and your family from financial ruin. In general, the premium for a large insurance policy is much less expensive in terms of money paid. Because very few insured people end up claiming the insurance, the life insurance company takes the risk of providing a high level of coverage for a low premium.

This is why you can get insurance for a large sum at a low cost. An insurance company can provide insurance to any individual or company, but the decision to provide insurance is at the insurance company’s discretion. To make a decision, the insurance company will evaluate the claim application. In general, insurance companies refuse to insure high-risk applicants.

Monthly Income Scheme

A monthly income scheme is a type of mutual fund plan that invests primarily in equity securities to generate cash flows and save capital. MIPs are best suited for retirees seeking a steady income rather than capital gains.

As the name implies, a monthly income scheme is a scheme in which the individual receives a set amount of money each month. This money usually accumulates after a few years of paying the premium. The term “monthly income scheme” is more common in the mutual fund industry, and in the life insurance industry, these types of plans are commonly referred to as monthly guaranteed income plans, assured monthly income plans, or monthly pension plans.

What to Consider Before Buying a Monthly Income Scheme?

A monthly income scheme assists the insured in obtaining a guaranteed return for himself or his nominees if he is unable to provide for them.

Some things to think about before investing in an MIS scheme are the expected returns, the period of the payouts and the premium, the type of income generation required if the unthinkable happens, and so on.

Each factor will be influenced by the investor’s earnings, current lifestyle and desired future lifestyle, tax savings plans, etc. Let’s take a look at what the investor should do before purchasing a monthly investment plan.

Taxation on Monthly Income Scheme

Monthly income schemes are taxable because they are debt-oriented funds. MIPs are subject to all of the rules governing long-term capital gains tax (LTCG) and short-term capital gains tax (STCG).

For example, if the investor sells the units before the three years is up, the STCG (Short-term Capital Gains Tax) is added to his income. These are taxed based on the investor’s income tax bracket. On the other hand, if the units are held for more than three years, a 20% LTCG (Long-term Capital Gains Tax) is applied.

On the other hand, investors are eligible for indexation benefits and are not taxed on dividends received. Before dividends are distributed, the fund house charges a 25% dividend distribution tax.

Individuals in higher tax brackets should consider investing in dividend plans because they can benefit from tax breaks not available in other traditional plans. Individuals in lower tax brackets should consider investing in growth options rather than dividend options to reduce tax liability and achieve higher returns.

How is the Monthly Income Scheme Different from Other Fixed Investment Options?

Monthly income schemes are hybrid instruments in which a small portion of the portfolio, typically 5 per cent to 25 per cent, is invested inequities, and the remainder, 75 per cent to 95 per cent, is invested in debt and money market instruments. Monthly income plans, as the name suggests, aim to provide investors with monthly income. In a monthly income scheme, investors can choose to receive dividends on an annual, half-yearly, quarterly, or monthly basis.

The primary distinction between monthly income plans and fixed investment options is that returns in the MIS scheme entirely depend on the fund’s market performance. In contrast, fixed investment options provide investors with guaranteed returns. On the other hand, monthly income plans are tax-efficient when compared to fixed investment options, and dividends declared under MIPs are tax-exempt.

MIS schemes are typically a great investment option for investors who are planning for retirement or who want to generate enough income to cover their monthly expenses. However, before investing in MIPS, investors should consider the risk factor. A monthly income scheme can be used as an additional source of income and the individual’s regular income.

Wrapping It Up

You can purchase an insurance policy both offline and online, whether it is for life insurance, health insurance, or general insurance. There are insurance agents who can help you buy a policy, and there are websites where you can buy a policy. Before selecting and investing in an insurance policy, make sure that you have done your homework.