An Investment policy is a combination of insurance and investment: Investment policy has typical maturities of ten, fifteen or twenty years up to a certain age limit. The life of the individual taking the policy is insured for a certain amount. This life cover is referred to as the sum assured. Investment Policy combines the risk cover with financial savings. Historically Investment policies have been the most popular policy in the world of life insurance. This is because people still consider "Investment plan" as an investment rather than "pure insurance".
In an Investment Policy, the sum assured is payable even if the insured survives the policy term; if the insured dies during the term of the policy, the insurance firm has to pay the sum assured like any other pure risk cover. A pure Investment policy is also a form of financial saving, whereby if the person covered survives beyond the tenure of the policy; he gets back the sum assured with some other investment benefits.
An Investment policy may declare a bonus every year: The money that is invested generates a certain return every year. This return may be declared as a bonus. The bonus is typically generated as a certain proportion of sum assured or life cover as it is popularly known. However, the bonus declared does not compound it, only accumulates over the life of insurance; thus, returns are low.
For example- if an individual taking the policy has a policy of sum assured Rs. 20 Lakh and the company declares a bonus of Rs. 10 per thousand of sum assured, then the bonus works out to be Rs. 20,000. Now since this bonus is not compounding every year, it will remain Rs. 20,000 till it is paid out. Hence, you could see a disadvantage here that you are essentially loosing interest on that money. This bonus may accrue to the insurance holder till the maturity or it may be paid out before the maturity as well.
Investment Policy has the following advantages:
Unlike term plans where one does not get any benefit on maturity, the basic attraction of an Investment plan is the maturity benefit. Therefore, the return generated on the premiums is an important factor while choosing a plan. Returns depend on the bonuses that accrue on the policy. Being an Investment assurance policy, this plan is apt for people of all ages and social groups who wish to protect their families from a financial setback that may occur owing to their demise.
In addition to the basic policy, insurers offer different benefits such as double Investment and marriage/ education Investment plans. The cost of such a policy is relatively higher. Other riders that can be attached to the main policy are Critical Illness rider, Term and Major Surgical Assistance rider.