Comparing Insurance and mutual funds. How to choose?

Difference between life insurance and mutual funds

Now a day’s life insurance is also touted as a high-performance and flexible financial investment option by companies that offer unit linked insurance schemes. These schemes are presented as an alternative to mutual funds although life insurance and mutual funds are two very different financial instruments which are designed to serve different purposes. When planning your financial investments and future both of these instruments can be and actually should be part of one’s long-term investment plan. Primarily an insurance policy is designed to pay lump sum amount to the investor on maturity or to the dependents in case of death.

Function of insurance plans and mutual funds

The primary function of a life insurance plan is to secure the financial future of your loved ones thus any return that one will gain through investment options in debt, equity or a combination of both will remain secondary. On the other hand the primary purpose of mutual funds is investments and returns hence here the primary goal of mutual funds is to provide healthy return on investment.  Thus both financial vehicles act in accordance to their primary goals. One advantage in opting for insurance plan is that most insurance plans provide tax benefits. Whereas financial investments such as that one makes in a mutual fund provides no such advantage. To read more on mutual funds, visit the Upwardly website at

Flexibility provided – insurance plans vs. mutual funds

Another major difference between mutual funds and insurance plans are that insurance policies are far more transparent yet far less flexible. There is a lock in period on premiums that you will pay in case of life insurance policies. Many financial institutions are now offering products known as variable life insurance plans that have hybrid properties meaning these products have incorporated within them benefits and purpose served of both of life insurance and that of mutual funds. When you invest in such plans usually a part of the investment will go towards providing you a life cover and a part is invested as a mutual fund.

Returns provided – insurance plans vs. mutual funds

As mutual funds are investment vehicles in which money gathered from various investors and then invested in stock and bonds, mutual funds are managed by an investment professional or fund manager. The fund manager handles the portfolio on a day to day basis and invests so as to maximize your returns. There is no such activity in case of life insurance. One more difference between life insurance plans and mutual funds is deduction of risk coverage in case of life insurance plans. Although mutual funds also have their own expenditures and charges such as input and output charges but these are generally lower than in case of life insurance plans.

What are variable life insurance plans?

So, which investment instrument one should choose to invest in a mutual fund, a life insurance plan or a variable life insurance plan? Well that will mostly depend upon the needs of the investor. If you have dependent who lack income and your goal is to secure their future it is best to invest in a life insurance plan that will provide a lump-sum amount after your death so as to pay their bills, take care of any loan or simply maintain their lifestyle. On the other hand if you don’t have any real dependents and your primary aim is return on your investment then you may invest in mutual funds.

Choosing between insurance and mutual funds

Although it is best to invest separately in life insurance and in mutual funds but if one cannot afford both and yet needs benefits of both he can invest in variable life insurance plan. One can always opt for a cheaper term insurance policy instead of buying a variable life policy and then invest the insurance premiums saved to buy mutual funds. By design insurance plans and mutual funds are not comparable and are intended to meet different objectives. Basically if one wants to invest and benefit from the stock market in a systematic manner, mutual funds are a great option. On the other hand if one wants to safeguard financial future of loved ones then life insurance is the answer.