For Quick Alerts
ALLOW NOTIFICATIONS  
For Daily Alerts

Ignore anyone who tells you ‘insurance is an investment’

|
Ignore anyone who tells you ‘insurance is an investment’
Insurance agents have a tendency to sweet-talk people into buying life insurance for "investment purposes". It is not their fault entirely. They are just selling us what we want to buy.
 

The main function of insurance is to provide financial protection from risk and the ultimate risk in the case of life insurance is death. The job of a life insurance policy, therefore, is to protect your dependents in the event of your passing. At this point, the insurer will pay the death benefit from your policy-an amount that should provide adequate financial coverage to your family, thereby compensating for the reduction in household income caused by your death.

There is no confusion thus far. You buy a policy, pay the premiums every year, and when you die, your family receives the death payout. The confusion arises when you combine insurance with investment.

Insurance versus investment

The death benefit mentioned above refers to the insurance aspect of the policy. However, insurance buyers are increasingly attracted to life insurance plans with an investment feature.

Example: 30-year-old Rajeev is shopping for life insurance. His financial advisor suggests a 20-year pure term plan because it is a cheap, no-frills plan, and Rajeev can always switch to permanent life insurance once his budget permits. If Rajeev dies during the duration of the policy, his family will receive a death payout of Rs. 10 lakh. But Rajeev has a question: "What do I receive if I survive the 20-year period?" The finance person answers, "Nothing."

This is not to Rajeev's liking. He feels that since he is "investing" close to Rs. 2,000 per annum for over 20 years, he should have something to show for it if he survives the term.

This is a typical reaction, but life insurance was never meant to give you a good deal. There are alternatives, of course. Instead of a term plan, you could get permanent life insurance-it has no end date and a guaranteed death payout; so your family, at least, will have something to show for all the premium payments you made over the years.

 

If you still want to add an investment component to your policy, think again. Insurance policies are expensive investment propositions. Taking Rajeev's case again, a 20-year term plan of Rs. 10 lakh coverage costs less than a couple of hundred rupees each month; work in an investment aspect and the monthly premium could rocket to Rs. 60,000-an additional Rs. 58,000.

The question here is whether the return on investment is worth it. A mutual fund could provide returns of 12 percent and more. Risk-averse investors who would rather not dabble in the equity market could benefit from a PPF, which provides tax-free returns of 8.6 percent. Even a fixed deposit at your local bank could give you healthy returns of over 8 percent. Do the math. Does your insurance-cum-investment policy match up to the returns guaranteed by these other pure investment instruments?

Ask yourself why you invest. The answer is simple: to make your savings multiply. Naturally, you want to invest in instruments that promise the highest returns on investment. Compare the figures and you will come to one conclusion: insurance offers extremely low returns; hence, it is a poor investment option.

Written By: Deepak Yohannan

The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal

For more articles by Deepak Yohannan, please visit MyInsuranceClub.com

You may contact him directly on Twitter: @dyohannan

Read more about: insurance tax free mutual funds ppf
Story first published: Friday, October 4, 2013, 10:11 [IST]
Company Search
Get Instant News Updates
Enable
x
Notification Settings X
Time Settings
Done
Clear Notification X
Do you want to clear all the notifications from your inbox?
Settings X
We use cookies to ensure that we give you the best experience on our website. This includes cookies from third party social media websites and ad networks. Such third party cookies may track your use on Goodreturns sites for better rendering. Our partners use cookies to ensure we show you advertising that is relevant to you. If you continue without changing your settings, we'll assume that you are happy to receive all cookies on Goodreturns website. However, you can change your cookie settings at any time. Learn more