In the last blog about Insurance, we discussed that Insurance Premiums are investments and not Expenses. Read the blog here. Today we are going to discuss whether Insurance Plans double up as your Investments?
But before we jump into the discussion, I am straightaway going to tell you the answer which is “NO”. So why is it that Insurance Plans do not double up as your Investment? In the earlier blog, I told you that your Insurance Premium is your Investment and not your Expense and now I am telling you that Insurance Plans do not double up as your Investments? Why am I telling that? Why this duality?
The answer is simple that Insurance plans are meant for Risk Management and not Investment. Sure, when you take Insurance just for the purpose of Risk Management, the Premiums are your Investments as it protects you from the Financial Loss. But when the same Insurance Model is used as Investment Part, that is where the trouble lies. Hence such two contradictory statements. Let us have a look at the definition of Insurance.
Insurance is a Contract between two Parties – The Insurer (Insurance Company) and The Insured (Insurance Taker), wherein the Insurer agrees to pay the Insured an agreed sum of amount in the event of some loss, damage or in case the death of the Insured Person.
Insurance was traditionally meant to cover your risk and not suit your Investment Needs. But when Insurance’s popularity was at stake, Insurance Plans were introduced as Insurance-cum-Investment Plans. These Plans are Endowment Plans, Money Back Policies, ULIPs, etc. You pay your Premiums, your Premiums will cover you against Financial Risk but when the Risk doesn’t occur (when you do not die), unlike Pure Insurance Plans where your Premiums were gone for good, these Insurance-cum-Investment Plan would return your Premiums with Increased Sum of Amount termed as Bonus together put as Maturity Amount of Insurance Plan if you survive the policy term. We are discussing Life Insurance here and thus the sole risk is either you die or you don’t. It is obvious that the option with a guarantee of return of your Premium would seem attractive and lucrative. These plans brought back the popularity of Insurance and once again the good old Customer was doomed under a good-looking scheme that will pay him/her/them nothing. But how?
Let us have an insight into why Insurance Plans are not good as your Investments. Let us compare it with a similar situation. Let us assume that you want to buy a Mixer Grinder and you also want to buy a Juicer. Now there is a product available in the market which fulfills both as Juicer and Mixer Grinder. So you get a 2-in-1 Product. Now it is obvious that the third product will seem attractive to you but when you enquire about the price of the product in most cases the price of the third product (a 2-in-1 product) will be higher.
The same applies to Insurance-cum-Investment Plans. You pay a hefty amount of premium where you get a lesser amount of Insurance Cover. Oh, so you are not going to agree with me yet? What you now require as an example? I should tell you; you are a hustler. You are not going to get easily tricked. So here is your Example.
Let us compare both types of plans of a Popular Insurance Company (Very Popular in India)
This Popular Scheme of a Popular Insurance Company offers a Sum Insured (Cover) of Rs. 10,00,000/- at a Premium of a whopping Rs. 64763/- and if we assume the highest bonus it will give you around 20,00,000/- at your death or at maturity.
Now taking the same Popular Insurance Company’s Term Plan (Pure Insurance) as a comparison you get a cover of Rs. 1,00,00,000/-at a Premium of 16500/-
Can you believe that?
You get 5 times more cover at 25% of the Premium of the 2-in-1 Plan. And if you take similar premium, you can get 20 times the maturity amount of 20 Lakhs. Read it again 20 times. And if you compare original cover of 10 Lakhs you can get almost 40 times more cover at same premium under Term Plan. 40 Times.
Note: Both these plans have been compared on the same criterion with the age of Insured at 40 Years and Policy term at 20 Years.
Now you must argue that the higher price is justified as the plan at least gives me my Premium back if I don’t die, unlike Term Plans which won’t return my Premiums if I survive till the Policy term. So, for the sake of your argument let us once see this Plan as an Investment Option. So how do you check if it is a Good Investment? Obviously, the Rate of Return it provides. Historically these types of plans have provided a Tax-Free IRR (Rate of Return) of 3%-4%. This particular plan has a return of 2.3% assuming the highest bonuses. Pretty much nothing. Even your Bank Fixed Deposit offers you higher than these. Even Saving Bank Account offers you a Pre-Tax Return near to these.
The Products that are meant to do one job should do one job. If A Machine overlooking the Quality Check Test starts Packing the Product, the end result will be Tampered Packing or even worse. It is better to leave the task designated for one product to that one product. Insurance Plans can form part of your Investment Portfolio if you want to Invest in Insurance Plans and not actually use it for Insurance Cover but also if the Return on the plan beats Inflation at least. You cannot just Invest anywhere. You check a 100/- product with utmost care then why Invest your Life Savings where you actually get lesser than what you paid. Consult an Investment Advisor or Insurance Advisor or Financial Advisor before venturing into Investment or Insuring. The only people who care about you are you and not a Product Seller. Choose and Invest Wisely. This is Shreyans Shah, signing off to write you a better blog to read.
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