Life Insurance vs Investment Plans: A Complete Guide
By Impact Desk | Updated: May 16, 2025 18:42 IST2025-05-16T18:42:08+5:302025-05-16T18:42:57+5:30
Life insurance & investment plans are important financial tools which help you become financially independent in 2025. But the ...
Life Insurance vs Investment Plans: A Complete Guide
Life insurance & investment plans are important financial tools which help you become financially independent in 2025. But the purpose of investing in a life insurance plan vs investment plans is different. Life insurance plans offer you financial security to your family members in case of an unforeseen event. On the other hand, investment plans offer wealth creation, helping you grow your hard-earned money over time.
As both of these financial instruments help you become financially independent and are critical for securing your & your family’s future, let’s understand the difference between the two & the outcomes you should expect from each of these instruments. Let’s understand both financial instruments in detail below.
What is Life Insurance?
Life insurance is an agreement between an insurance company, i.e., the insurer & an individual, i.e., the insured. Under any specific circumstances, loss, damage or injury occurs to the insured,& this legal bond entitles him to receive the financial security from the insurer. So, the primary function of a life insurance policy is to provide financial protection to you&your family.
What is Investment?
Investment plans enable you to allocate your hard-earned money or savings with the objective of growing your corpus&creating wealth over a period of time. Investments can be either in tangible or intangible form, such as bonds, fixed deposits, mutual funds, shares or any other financial instruments available in India. You can opt for an investment option available based on your risk tolerance&needs.
If you are a risk-averse investor, then you can opt for guaranteed plans or investment options which provide guaranteed returns, like fixed deposits, PPF, etc.,&get a moderate return on your investments. If you are ready to take some risks&invest in market-linked investment options, you can get higher returns on your investment.
Difference between Investments & Life Insurance
Provided below are the differences between investments & life insurance:
Basis of Difference | Investment Plans | Life Insurance Plans |
Definition | It is a financial product where investments are made to a third party, either for the long term or for the short term, to receive the returns, i.e., the initial amount invested plus the profits. | It refers to an agreement between an individual & an insurance provider company, where the former pays a regular premium amount. The latter in this case provides financial security to the policyholder’s family members in case of any unfortunate event, i.e., the policyholder’s demise. |
Types |
|
|
Risk Component | Higher | Negligible |
Returns | Returns are comparatively higher than insurance. | Returns are comparatively low, which includes the sum assured & occasional bonus. |
Reasons to Buy | It helps build wealth & meet financial goals, such as building a house, a business startup, a child’s education, etc. | This plan provides financial security to your family members & lowers their financial burden in your absence. |
Why do you need to buy a life insurance plan in 2025?
Following are the most critical reasons to buy life insurance plans:
The main objective of buying an insurance plan is to get financial support for the beneficiaries in case of an unfortunate event.
Life insurance plans can also come with dual benefits of savings & insurance cover, which help to meet future financial obligations.
Why do you need to invest in an Investment Plan in 2025?
Let’s check the most important reasons of investing in an investment plan:
The returns earned on investments compound over a period of time thus enabling you to earn interest over principal amount + interest earned already
It is a source of secondary income that helps in achieving objectives.
The long-term investments help you beat inflation & market-related fluctuations.
How Does Life Insurance Work?
Let us know the steps of how a life insurance plan works:
You will need to opt for a life insurance plan&pay regular premium payments to the life insurance company.
In case of your untimely demise, the nominee will receive the tax-free death benefit from the insurance company.
Nominee can use this death benefit amount towards the family day to day expenses, pay off any liability or loans, other expenses etc.
If you survive the policy period, you will not be paid any amount in case of a base term plan. The base term plan will only cover you against the policy period. But, if you opt for a life insurance plan which helps invests in life cover + investments, then you will get the cash value or returns on your investment on maturity.
How Does Investments Work?
Let us know the steps of how a life insurance plan works:
Define your investment objectives.
Identify the available investment options, such as mutual funds, bonds, stocks, commodities, etc. & evaluate them.
Plan your investment depending on the financial objectives & risk tolerance level.
Analyse the performance of your investments & then customise the portfolio accordingly to make necessary changes.
These returns can either be reinvested or used to achieve other financial objectives.
Conclusion
From the above details, it can be said that both insurance & investment plans play a vital role in achieving future financial objectives. Where insurance provides financial security to the family members of the policyholder, it secures finances by reducing their expenses. Investments, on the other hand &, help build & grow wealth.
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