Dear Readers,
We have kept faith in Insurance policies since ages. Whether any Indian household has any other form or savings or not, Life Insurance Policy is normally found on the name of working member in the family.
Over years, this insurance has wrongly turned into Investment Avenue for most of the Insured parties. But is Insurance really meant for Investments?
What is Insurance?
The purpose of insurance is to cover the financial aspect of risk. The risk can be of property, life, health, legal liability and of many other kinds.
Insurance is contract between the Insured and Insurer, where the Insured pays a fixed amount to the insurer, called as the Premium, and in exchange the Insured gets assurance from the Insurer, that incase of any casualties/Death/Loss of property of the Insured, the Insured party shall get a fixed pre-determined value i.e. Insurance value.
How much Insured Value one should have?
Life Insurance policy safeguards the risk of loss of life of the Insured. One should have an insurance policy which provides a lump sum to the dependents of the deceased in such a way that the corpus is sufficient to fulfil the financial needs of the dependents.
Let us understand this with an example.
Mr. A supports a family of four i.e. Mrs. A and their two children, and he is the only working member in the family. The financial expenses of the family are as follows:
- Fulfilment of monthly expenses of the family,
- Basic and Higher education of both the children,
- Marriage expenses of both the children,
- And lifelong expenses coverage of Mrs. A (Life expectancy – 80 years)
Say the present value of these expenses come to Rs. 1 Crore. Thus, Mr. A should have an Insurance of the sum assured of 1 Crore, which will ensure that all of these expense and financial needs of the family shall be fulfilled.
So far, so good. The problem arises when the insured starts looking at Insurance as an Investment tool. Insurance is meant to safeguard the life of dependents and not as an Investment tool.
Let us understand this with an example.
Mr. A, is 30 years old and has a family of four- a wife and two children to look after. He feels that in case of any casualties, his family should at least get a sum of Rs. 50 Lakhs. Thus he approaches Life Insurance Corporation and gets himself insurance policy for that value, and agrees to pay premium for 20 years on the same. So far so good.
Now, one fine day, Mr. A gets an increased pay of Rs. 10,000 per month and he decides to invest the further amount in a fresh Insurance policy in another plan (say Money Back plan) so as to have a better investment for his future.
Well, this is where he went wrong. The additional Rs. 1,20,000 could have been invested in a better opportunity such as Fixed Deposits, Bonds, PPF, Mutual Funds or shares for a long term and could have gained much better returns than investment in LIC, since he already had one Life Insurance policy.
INSURANCE VS INVESTMENTS
Over the period of years, Insurance has largely been perceived as Investment opportunity by novice investors. However, there is a thin line of difference between Investment and Insurance. An investment, in simple terms, is an asset or item acquired with the goal of generating income or appreciation. Let us look at some points of differentiation between Investment and Insurance.
- Liquidity: Assets and Investments are ought to be liquid. Investments in Banks, Bank FDs, RDs, Mutual Funds, Gold etc. are said to liquid investments, and Insurance policy is locked for long period of time. Insurance amount is received at the time of death of the Insured or maturity of the policy, whichever is earlier. Though there are other tax saving avenues like PPF and Tax saving Mutual Funds, the lock-in period is lesser as compared to Insurance policies.
- Cost of Investments: Insurance brings with itself lots of hidden charges such as Brokerage, Service Charges and GST on the same. The Brokerage on premium paid can be anywhere between 15-25%, resulting into that much amount being less invested. On the contrary, commission received by agents selling Mutual Funds, Reserve Bank of India and other bonds is quite meagre. Thus, before investing, it is important to understand how much amount of the premium paid is actually invested.
- Rate of Return: The biggest drawback in investment in insurance are the low rate of returns. Insurance provide you an assurance against the risk however the returns provided by them are barely 4-5% p.a. if studied carefully. On the contrary, Investment in Mutual Funds provide returns of around 9%-15% compounded annually. Thus, if you seek Investments from insurance, it would be a very wrong move.
- Lack of Transparency: The insurance industry in India just doesn’t measure up to the standards that are followed by the mutual fund industry when it comes Investment. The performance of funds, the NAV, underlying assets of the Mutual Fund can easily be traced by simple research, whereas that is not the case with Insurance. As an investor, how is your insurance performing (except for ULIPs), whether the accumulated bonus is righteous or not, how much is the actual rate of return on Insurance is all very unclear to the Insured.
Thus, before investing, it is very important that you keep in mind all the above factors and then take any step. Insurance, no doubt is essential for every Individual. But treating it as an Investment opportunity would be a grave move.
However, we would like to introduce our readers to the concept of ULIP i.e. Unit Linked Insurance Plan.
What is Unit Linked Insurance Plan?
ULIP is a combination of insurance and investment. Here, some portion of the premium goes towards securing life insurance of the policy holder and some portion is invested just like a mutual fund is invested. This scheme provides dual advantage of assured insurance plus above average return from the premiums so invested.
The below mentioned chart will help you understand this better.
| Parameters | ULIP | Traditional Insurance Plans |
| Purpose | Insurance cover along with investment benefits. | Insurance cover |
| Return on investment | The return is variable as it is linked to Equity. ULIP has low fixed return, however in the long term, ULIP provides better returns than traditional plans. | The return is guaranteed as the investment in risk instruments are low. You will get fixed returns. |
| When should you consider | Consider ULIP if you want protection and more than nominal returns in a long term. | You must consider a Traditional insurance plan when you want protection against mishaps and nominal returns in a long term. |
| Flexibility | There is flexibility in this plan. You can decide what proportion of the amount that you are investing is to be used for insurance cover and what proportion should go towards the investment in equity. | No flexibility. |
| Tax benefit | Available under Section 80C. | Available under Section 80C. |
| Investment portfolio | The investment portfolio is unknown. The portfolio tracking can be possible if the insurance company is declaring its holdings. | No transparency and the investment portfolio remains unknown. |
| Lock in period | Minimum 3 – 5 years | The Traditional insurance plan is locked in till its maturity. |
| Security | No security | Highly secured. |
| SIP | Yes | Not available. |
| Switching options | Allows you to switch between the funds linked to the plan. You will also be able to change the risk return. | Not available. |
Source: Bankbazaar.com
We at Richvik, are glad to announce you certain Mutual Fund schemes which provide you with Insurance worth 100 times of your monthly SIP, along with the regular returns that your Mutual Funds provide you with.
To know more on investments and Mutual Funds which provide the added benefit of Insurance, feel free to contact us.