Insurance is not a pure investment tool
Insurance is not a pure investment tool: It is more of a Risk Coverage Tool
Bhishma Pitamah (the famous character in Mahabharata) was blessed with a boon to end his life as per his will. He could command his death and as such knew the time of his demise. Unfortunately for us, we are not blessed with such ability. We are uncertain about the time of our death. It is often said that death and misfortune can strike anyone anytime. The uncertainty of one’s death resulting in the financial loss to the family gave birth to the concept of insurance. Insurance, by definition meant compensating the loss suffered due to unforeseen circumstances and so the policies were designed to meet this definition. However, with the passage of time, and the change in people’s perspective, insurance became synonymous with
- Investment and
- Tax benefit.
Nowadays, people perceive insurance as an investment tool that comes in handy while planning their tax savings as well. The protection part of insurance is either ignored or given the last priority. This practice has mandated this article which aims to state that insurance is not a pure investment tool.
The inception of insurance saw only term insurance being sold to people. However, as this plan promised nothing on maturity, people were averse to the idea of buying a term plan. This necessitated the insurers to come up with other plans like endowment, money-back and the more recent ULIP which combined insurance and investment and promised better returns to policyholders. But, in the process, the pure need of protection got lost somewhere in the way and now ULIPs have become the most hot-selling plan among the potential buyers. But we have to understand that buying an insurance policy for the sake of investment will be a loss to you and will also prove expensive. Let us see why insurance and investment don’t go hand in hand:
- Adequate cover and affordability is mutually exclusive in any plan except term insurance- one should have adequate cover on his life so that in his absence his family will be well taken care of. Buying a high cover endowment/money-back plan will result in very high premiums which will not be affordable. Only term plans offer the cheapest premium rates for high coverage amounts but they are absent any investment part
- Investing in insurance products don’t cause much capital appreciation- traditional products like endowment/money back do not appreciate your investments in trend with inflation and give a very conservative return (about5-8%). Even ULIPs which are invested in the market have limited growth prospects. As such, you cannot expect your investment in insurance to yield same results as a mutual fund could do.
Case study – Insurance is not a pure investment tool
Take the case of two individuals A and B. Both are 30 years old and want to invest for the next 30 years. Both want a cover of 20 Lakhs, pay the same amount and also want to earn investment returns on the money paid by them. One buys insurance as an investment tool while the other splits between pure insurance and a tax-saving equity based mutual fund scheme. Let us look at their portfolios:
The growth rates for bonus is taken a bit higher while for mutual funds is taken lower. The difference in payout is evident and it highlights why insurance is not an investment tool. Moreover, a cover of mere 20 lakhs is not sufficient to provide for one’s family and needs to be increased. This can be done by opting for a higher term plan because a high cover under endowment would prove very expensive.
Thus, remember, Insurance is not a pure investment tool. Buy a pure insurance product like term plan solely for protection purposes. Don’t expect anything in return (don’t you spend thousands on that new luxury phone or a designer dress? Your life is more precious than them, isn’t it?). For investments, the market is flooded with variety of products that cater to your risk appetite and liquidity requirements. Insurance should be used for insurance purpose only, not investment.