Are Convertible Investment Plan Viable Savings Options?

A convertible investment is a financial tool that provides you an option to convert one policy to another policy at a later date. By investing into a convertible plan, you need to maintain a policy for a specified amount of time and then the insurer allows you to convert it into another policy.

When it comes to the viability of convertible investment plans, you can invest with bonds and stocks.

Convertible Bonds

It is a type of debt security that can be converted into pre-determined amount of the company’s common shares at any time during the bond’s life, depending on the choice of the bondholder.

Key Features of Convertible Bonds
  • Conversion of bonds to common shares is independent of the market value of the shares and it is non-taxable.
  • Convertible Bonds have a lower volatility and higher safety, compared to corporate stocks.
  • Convertible Bonds have a coupon payment and it ranks prior to the company shares/stocks. Their value, depends on the level of prevailing interest rates and the credit rating of the issuer.
  • You can take advantage of converting the bonds into common stocks, when the price of stocks goes up.
  • In case, the investor does not exercise the conversion option, he/she gets the regular cash flow from interest payment and the principal amount is paid back upon maturity.

Considering the key features, convertible bonds are best for those who seeks long term investment and looking for regular inflow of money from their investments. It provides great earning potential of conversion of bonds to high performing stocks, which makes it a viable saving option.

Convertible Stocks

Convertible stock is preferred stock that provides an option to convert these stocks into a fixed number of common shares and you can exercise this option any time after a pre-determined date. Usually, Convertible stock is exchanged at the request of the holder, but the company has the provision for force provision. The value of convertible stock is based on its performance.

Key Features of Convertible Stocks
  • If the value of the common shares rises, it becomes an attractive option.
  • If you are seeking an investment having low risk initially, but offers higher return, the investing with convertible stocks is the best and viable option.
  • Usually, preferred stocks have an upper price limit. However, when convertibility is added, there is no such limit and it becomes beneficial when the company’s stock price goes up. There is a great potential of good capital gain with convertibility option.

Convertible Insurance Plans

Convertible insurance plans are actually designed for those who at present, are unable to pay the larger premium required for an endowment policy, but expect to be able to pay such premium for a policy in the near future.

When it comes to insurance, it would be a right move to buy a pure protection plan (term life policy), which is available with low premiums that you can easily afford and later on, convert it into a saving investment plan. As, a term plan does not provide any maturity benefit, so in order to attain savings, you must want to convert it into a savings policy may be an Endowment plan.

You have the option to convert it into an endowment policy later on at any time during the course of an insurance policy. You can exercise this option, when you may find it easier or more affordable to opt for.

  • Benefits of Choosing a Convertible Policy

A convertible policy offers you some key benefits, you can’t avoid at all.

Achieve Savings: In a term plan, the mortality charges increases as your age advances, so the flat premium structure of the term plan with a convertible option helps you to contribute the larger amounts towards the savings. In this scenario, buying a convertible plan proves to be a cheaper option, compared to buying a fresh endowment policy. It would be a wise decision to buy a term plan that would help you get the pure life cover and then convert it into a savings policy say, an endowment policy that would help you to achieve the savings goals as well.

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Easy Procedure: In case, you are heading to buy a fresh endowment policy at 45+ years of age, a medical check-up would be required that may lead to rejection of insurance, due to the bad health condition. When you convert a term plan into an endowment policy, the insured need not to go through medical checkup or additional screening. With the help of convertible option, you need not to buy a separate policy to accumulate the corpus amount.

No Additional Cost: No extra cost is levied even after the conversion of the policy. Under a convertible policy, the flat mortality charge is only applicable.

Buying a convertible insurance plan, typically a term plan firstly provides you the life cover and after conversion into an endowment plan, it helps you to accumulate savings that makes it a viable savings option.

Conclusion

When it comes to investing, it’s a wise decision to go with convertible saving investment plan, as it helps you to receive higher returns. Convertible stocks and bonds have proven itself the viable saving options. For insurance products, you can also buy convertible term plans that also help you to accumulate savings. Do a careful analysis, before investing with convertible products.

Harjot Singh Narula

Harjot Narula is founder and CEO of ComparePolicy.com, an IRDAI approved insurance web aggregator focussed on selling online insurance for companies. Harjot has more than a decade of experience in software development and has also spent 5 years in US working for the mortgage and risk management industry.

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