Life Insurance or Retirement Plan – Which is the Ideal Solution

Planning for your own retirement is one of the most important financial decisions that you need to make. When it comes to planning for the future, the earlier you start, the better it is. While most youngsters who are entering the workforce don’t want to think about the time when they aren’t working, they’re at the right age to figure out a long-term pension plan for themselves, one that will allow them to lead a comfortable life once they’ve decided to retire.

If you’re ready to start planning for the future, there are two ways you can go about it. You can either choose to put your money away in a traditional retirement plan. Or, you could purchase a life insurance policy that offers varied benefits.

Before we get into the benefits of each type of insurance, let’s first understand what is life insurance? Simply put, a life insurance policy is a contract of sorts between you and your insurance provider. You agree to pay annual premiums that are invested for you, and the insurance provider promises to provide you and your family members a certain amount of money in case of eventualities such as disability or death.

Now that we know what life insurance is, let’s take a look at how retirement and insurance plans work when it comes to planning for the future:

Retirement Plans

Retirement plans always start with an accumulation phase. From the moment you purchase the plan until the time you retire, you pay a yearly premium. This premium, which offers certain tax benefits, will then be invested for you. Once you retire, you are allowed to withdraw a third of the money that has been accumulated by the investments made. You are not required to pay any tax on the amount withdrawn. The rest of the money, however, will have to be used to purchase an annuity plan. This phase of the plan is known as the annuity phase, and the plan you purchase will be the source of your income for the rest of your life. Of course, the pension that you receive every month is subject to the interest rates prevalent at that point of time, and can be taxed.

Unit-Linked Insurance Plans (ULIPs)

A combination of insurance and an investment, a ULIP is one of the most preferred ways for individuals to plan for their retirement. In a similar fashion to pension or retirement plans, you are required to pay an annual premium for your ULIP. A part of the premium you pay is used to provide you with life insurance benefits, while the rest of your premium is invested in a number of avenues, such as bonds, market funds, equities, hybrid funds, or debts. The kind of funds for your investment will be chosen on the basis of your personal risk appetite. On the plan’s maturity, you can either ask for the returns to be given to you in a single lump sum, or you can choose to stagger the returns as a sort of monthly pension. The benefit of a ULIP over a pension plan is that the amount you have accumulated can be withdrawn fully – and is completely tax free.

The other benefit that you enjoy from a ULIP is that of insurance. Since a part of your premium is used to buy life insurance, you can rest easy knowing that even if anything were to ever happen to you, your family would still have financial stability.

Although the premiums for ULIPs are slightly more expensive, the peace of mind it offers is definitely worth it.

Vikas Agarwal
the authorVikas Agarwal
Vikas Agarwal is an IIT-Varanasi graduate in Chemical Engineering. He is the Founder and CEO of Finaacle.com - an investment advisory website. He is a Business Development Professional but a Value Investor at heart. He writes articles on Finaacle, which focus on simplifying the art of investing and the causes of human misjudgment when it comes to investing. He also shares his experiences as an investor and lessons from some of the greatest investors of all time.

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