Should You Make Life Insurance Part of Your Savings Plan? Here Are Key Differences and Benefits
Surprisingly few people put a savings and life insurance plan together, but it can bring you some surprising benefits.
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Do you have guaranteed income for your family if the worst happens?
If so, that's excellent news – but most people do not and thus need to look at life insurance and savings plan products to provide financial security for their families once they retire or should they pass away prematurely.
If you’re in this position, you may find this tough, especially when:
Yet having a clear understanding of the long-term financial options available to you is essential if you wish to build a stable future for yourself and your family.
Continue reading to learn about the key difference between life insurance and a savings plan, which one may be best for you, and the benefits of having life insurance as part of your savings plan.
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If you’ve ever looked at life insurance and savings plans and wondered, "What's the difference?" then you’re one of many people working out which option is best for them.
Both are valuable tools for financial planning, but they serve distinct purposes. Let's start with a basic definition of each then break it down to make their differences clear.
Think of life insurance as an umbrella for your loved ones. It offers life cover – a guaranteed payout (sum assured) to your nominee (the person you’d like the money to go to) in the event of your death.
You keep your side of the bargain by paying regular installments into this fund, an amount that varies depending on your age or health condition. If you have a job, then your employer might deduct this amount from your regular income (with your permission) and pay it on your behalf.
They might even offer you a life insurance policy with no further contributions from you as a job perk.
Yet there pressing question: just how much cover should you take out? Well, there is a general rule of thumb according to Tony Forchione, contributor to financial specialists Money Saving Expert.
“If you are considering a policy, you'll need to think about how much you'd like it to pay out if you were to die, “ says Forchione. “This could be determined by the monthly payment you can afford, but a good rule of thumb is to aim for 10 times the annual income of the highest earner.”
Savings plans focus on building your wealth over time. They function like investment plans where you regularly contribute money (premiums) that grow at a certain interest rate.
Like with life insurance, it’s sensible to pay regular contributions into your savings fund, however, this is not obligatory.
You also get more control over your savings, unlike your insurance money, which you may never get to see. This means you can choose to invest your regular savings to try and grow your amount quicker, such as in stocks and shares or bonds.
You might also want to adjust your contributions during your life, according to your financial situation.
With these basic definitions clear, let’s look at other important differences between these two financial options.
Some permanent life insurance policies have a built-in savings element called cash value.
This is where a portion of your premium goes toward a pot of money, which grows over time with interest or even market returns (depending on the policy type). This cash value offers you some possible benefits, such as a loan based on the value or even a cash withdrawal.
The growth in your cash value may also be tax-deferred, so you don't pay taxes on it until you withdraw the money.
Savings, of course, can’t offer this specific feature, but some bank accounts offer you higher interest rates and other perks (like premium account features) on regular contributions.
Some banks even offer maturity benefits once the term plan has reached its maturity date, along with any accumulated interest or earnings.
If you’re not sure about these or how they work then it’s best to check the FAQs on your policy document, or chat with an advisor as soon as possible.
Savings plans offer flexibility, whereas life insurance doesn’t.
You can easily access your savings whenever needed, whereas life term insurance (especially permanent life with cash value) might even have surrender charges for early withdrawals.
You’re also typically locked in to paying a minimum amount for the rest of your life while you can take a break from savings contributions if you wish.
Savings may offer you investment and interest earnings potential, but you’ll probably have to pay tax on the money you make.
Life insurance companies, meanwhile, may offer you tax benefits on your monthly payments. ULIPs (Unit Linked Insurance Plans), for example, offer tax benefits on premiums paid, maturity payouts, and potentially on investment gains under certain conditions.
Some savings plans offer various investment options to potentially grow your money faster, catering to different risk appetites. These might be a good idea but there is obviously the risk of market dips.
Life insurance policies typically offer much slower growth as they don’t tend to come with investment opportunities for policyholders.
Life insurance provides peace of mind knowing your loved ones are protected, even with the potential for building cash value. Savings plans help you grow your wealth and reach future goals, with potentially higher returns but also some risk. Consider your needs – you might even benefit from both!
Choosing between life insurance and a savings plan can be a tough choice. Ultimately it comes down to your personal situation.
People who don’t know how to stop spending money on unnecessary items, for example, may struggle to commit to a rigid life insurance policy.
Here are some questions to consider to help you decide if you find yourself in this dilemma.
Disclaimer: The below is not financial advice, but instead a general explanation of life insurance and savings plans. To make the best choice for your specific needs, consult with a qualified financial advisor.
Savings plan: A better choice if you anticipate needing the money in the short term (next few years) due to its easy access. There might be limitations on withdrawals, but a savings plan is generally not as strict as surrender charges with life insurance.
Life insurance: Not ideal for short-term needs. Surrender charges for early withdrawals can significantly eat into your cash value.
Likely answer: Savings plan
Savings plan: One of the benefits of saving money for retirement is that it’s more flexible if your income is variable. You can easily adjust your contributions to your retirement plan based on your income flow.
Life insurance: Premiums are fixed, so if your income fluctuates, it might be harder to maintain the policy.
Likely answer: Savings plan
Savings plan: May not be enough on its own if you have dependents. It can help with future goals, but it won't provide the same level of immediate financial protection as life insurance.
Life insurance: A strong choice if you have dependents. The death benefit offers crucial life cover for your loved ones and financial security for them in case you pass away. Cash value can also be a potential supplement to their future needs.
Likely answer: Life insurance
Savings Plan: Might be a good option to build an emergency fund and cover unexpected expenses if your essential outgoings are high.
Life insurance: May not be the most pressing need if a significant portion of your income goes towards essential expenses. Consider prioritizing building a safety net first with a savings plan.
Likely answer: Savings plan
New advances in technology are making it easier to find the answers to these questions. Generative AI in finance, for example, is making it possible for smart chatbots to provide instant answers whenever you need them. All you need to do is type the query into a ChatGPT-style interface to get an informed response.
Life insurance and savings plans are two popular financial products but it’s rare to find the two as a combined option.
Accessing money from a life insurance policy is often restrictive, as mentioned, and early withdrawals come with withdrawal charges.
There are also tax implications. While some countries have legislation that offers tax benefits for insurance premiums (such as Section 80c of the Income Tax Act in India which offers up too Rs. 1.5 lakhs per financial year), withdrawals might not be entirely tax-free.
Depending on the policy type (e.g., endowment plan) and withdrawal method, some portion might be taxable which complicates things for customers. Many financial providers choose not to go down this route as a result.
Yet, there are some providers that now combine life insurance with savings, so that you get the best of both worlds.
Life insurance might seem solely focused on providing a financial safety net for your loved ones (life insurance coverage) in case of your passing. Yet some types of life insurance can also play a valuable role in your overall savings strategy.
Here's how:
As mentioned, some life insurance plans, particularly the best savings plans and endowment plans come with tax benefits. A portion of the premiums you pay can be deducted from your taxable income to give you tax savings.
Life insurance plans often require consistent premium payments over a set policy term. This regularity is a powerful tool for building a disciplined savings habit.
Unlike a readily accessible savings account, you're less likely to tap into these funds for impulsive purchases during the premium payment term.
Some life insurance products offer assured returns or maturity benefits – a lump sum payout at the end of the policy term. You get a degree of certainty for your long-term financial goals, like retirement, this way and it protects you from market fluctuations that traditional investments might experience.
This is the core benefit of life insurance. A term life insurance plan offers pure life cover at a lower annual premium compared to savings plans or endowment plans.
In the unfortunate event of your passing within the policy term, your beneficiaries receive a death benefit payout, which can help them maintain their financial stability and address immediate needs. This financial security can be particularly important if you have dependents.
Many life insurance plans allow you to add optional extras to your policy for a customized level of protection. For example, a waiver of premium rider means your policy stays active even if you become critically ill and are unable to pay premiums.
Like with all things in life, achieving financial security is built on a deep knowledge of money-related concepts, including knowing whether life insurance or a savings plan is best for you.
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