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How Do Life Insurance Companies Invest Your Premiums?

Updated On Jun 15, 2021

In a life insurance plan, you have to pay a regular amount that is invested by the life insurance company. This is called the premium amount. Subsequently, you get returns in the form of various benefits. 

This investment component is often not very clear to most policyholders. On the other hand, it is always best to know about your life insurance plan in detail, to avoid confusion and doubts. Read on to find out how life insurance companies invest your premiums.

Why Do Life Insurance Companies Invest?

Life insurance companies gather premiums from many policyholders. For all those who purchase life insurance plans, their money is gathered into a larger fund. Since it is not always actively required, a major portion of this collective fund is invested into investment funds. This yields further funds that can then be used as profits for the company and even other non-guaranteed benefits for policyholders. 

Where Do Life Insurance Companies Invest?

Life insurance companies generally invest the collective premiums of all their policyholders in equity and debt funds. They are not high-risk investment funds and the returns are usually stable. In the case of ULIPs, the policyholder themselves have the flexibility to choose the kind of market-linked investment fund they would want to invest in. They can regulate the amount of risk they are willing to undertake by choosing an appropriate fund.

IRDA Regulations For Life Insurance Companies

If you are worried about investing through a life insurance company, do not be. All life insurance companies and their activities are strictly regulated by the Insurance Regulatory Development Authority of India (IRDA). There are several pointers that the life insurance companies have to abide by.

From the very initial stages of an insurance company, it is regulated by the IRDA. For starters, life insurance companies must have a minimum capital and a regular solvency ratio of 150%. Effectively, this comprises the complete liabilities of the company and an additional 50%. This reduces the risk of bankruptcy and keeps the company, as well as, the policyholders, safe. 

Conclusion

A life insurance policy is a safe way to save up and invest your financial assets. It helps you invest your money in an efficient and judicious manner so that you do not face any financial problems or crises later on. The investments made by your life insurance premiums, through the life insurance company are completely reliable, trusted and safe. Therefore, make sure to purchase a life insurance plan as soon as possible.

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