Premium Allocation Explained
When you invest in a Life Insurance Corporation (LIC) policy, your premium payment is not simply stashed away; it goes through several stages before contributing
to your returns. A portion of your premium is initially allocated towards various charges, encompassing expenses like agent commissions, administrative fees, and any mortality charges which cover the insurance protection component. The remaining amount is then available for investment purposes. The exact allocation can differ significantly based on the type of policy you opt for, which affects the balance left for investment. For example, in traditional policies, a considerable part of your premium covers these charges in the initial years, while in unit-linked insurance plans (ULIPs), the allocation toward investments is relatively more, although they also have charges, and investment risk is completely on the policyholder.
How LIC Invests Your Money
LIC employs a diverse investment strategy to manage the funds collected from its policyholders. The corporation invests across multiple asset classes to balance risk and returns. A considerable portion of the funds is channeled into government securities, which are deemed relatively low-risk investments. LIC also invests in corporate bonds, providing an opportunity for higher yields compared to government securities but also comes with increased credit risk. Furthermore, a portion of the funds is directed towards equities (stocks), which potentially offer higher returns in the long run but also involve higher volatility. Additionally, LIC may invest in real estate and other infrastructure projects. The allocation across these different asset classes is decided by LIC's investment strategy, always considering factors like market conditions and the need to balance security and profitability to meet its obligations to policyholders.
Policy Charges and Deductions
Before your money begins generating returns, your LIC policy is subject to various charges that impact the investment component. These charges cover operating expenses, including administrative costs, agent commissions, and mortality charges. The exact charges vary based on the specific policy type. In the initial years of a traditional policy, a significant portion of your premium goes towards these charges, reducing the amount initially available for investment. Mortality charges are especially crucial; these cover the cost of the insurance coverage, protecting the policyholder's family in the event of their death. Additional charges like policy administration fees, fund management fees (in ULIPs), and sometimes premium allocation charges, also apply. Knowing these charges helps you understand the true impact on your investment and the returns you can expect over time.
Understanding Your Returns
The returns from your LIC policy are influenced by several factors, including the performance of the underlying investments. In the case of traditional policies, the returns are typically based on the declared bonuses, which are declared annually or at the end of the policy tenure. These bonuses are added to the sum assured, boosting the overall payout. ULIPs, on the other hand, provide market-linked returns, meaning the value of your investment is subject to fluctuations based on the performance of the underlying market assets. The returns are affected by the market performance, including factors like stock market growth or the creditworthiness of bonds. Understanding the nature of the returns, whether guaranteed or market-linked, is essential for predicting your future financial gains and assessing the overall value of your LIC policy investment.
Benefits of Your Policy
An LIC policy provides more than just financial returns. The primary benefit is life cover, which offers financial security to your family in the event of your death. Additionally, your policy can offer maturity benefits, which include the sum assured plus any accrued bonuses when the policy term ends. Many LIC policies also provide riders, such as critical illness cover, accidental death benefit, or disability cover, adding additional layers of protection. Furthermore, depending on the policy, your premiums might be eligible for tax benefits under sections like 80C and the maturity amount could be tax-free under section 10(10D) of the Income Tax Act. The specific benefits vary based on the type of LIC policy you have, but they all collectively contribute to a well-rounded financial plan that offers security and potential financial growth.
