Insurance is popularly bought for saving, investment and tax saving purpose by a large no. of people. But is this the right approach? What we have found is that insurance is a highly misunderstood product and it’s bought/sold for all the wrong reasons. The primary purpose of an insurance policy is to provide financial protection against uncertainties like loss of life. When something happens to the earning member of the family, the insurance is supposed to provide financial support to dependents so that they can lead a normal life.
Therefore while buying insurance cover, what needs to be considered is whether the sum assured is right for your family or not. Secondly what is the cost you are bearing for that sum insured.
Let us take an example of a person who is contemplating buying insurance. He has many options like term, endowment, ULIP etc. The choice becomes difficult when every policy is claiming to provide you insurance and guaranteed returns. Contrary to what the sales agent or an advertisement tells you, insurance as an investment product does not make a lot of sense.
We are going to demonstrate how does a term insurance compare with a popular endowment scheme. The analysis below also shows you how keeping insurance and investment separate gives better returns.
Scenario 1
You buy LIC Jeevan Mitra Endowment policy with following specifications:
Age of the policy bearer: 25 years
Term: 15 years
Annual premium: Rs 69,829
Sum assured Rs 10,00,000
Total premium paid over 15 years: Rs 10,47,435
Amount you get if you outlive the policy term after 15 years: 16,00,000 (it includes sum assured of 10 lacs and annual bonus of Rs 40,000 per year for 15 years)
Scenario 2
You buy LIC Anmol Jeevan Term policy with following specifications:
Age of the policy bearer: 25 years
Term: 15 years
Annual premium: Rs 2,356
Sum assured Rs 10,00,000
Total premium paid over 15 years: Rs 35,340
Suppose the person puts the difference of Rs 67,473 (69,829 - 2,356) in secure and guaranteed return product PPF (Public Provident Fund) with a public sector bank every year.
Amount you get from the insurance policy = 0
The amount you will get from the safe PPF = Rs 20,93,063
If you invest this amount in an equity linked product for 15 years the returns will be even better. What it tells you is that mixing insurance and investment is not a wise thing to do. You can do much better by separating the two as shown in the example above. Of course no insurance agent will advise you to do this since it’s a question of their livelihood. You have to ask hard questions and do your own analysis.
Conclusion
It’s not that endowment plans or other insurance policies are outright bad. It makes sense for people who are risk averse and may lack the discipline to invest on their own. For them insurance policies provide an avenue for disciplined investment even though the returns are not going to be great. The internet has made it easy to explore whole and term life insurance quotes to determine the right coverage. But with some analysis you can do better.
The author Sridhar Nag is CFP certified financial planner
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