A friend of mine over a phone asked me about insurance and whether he should invest in LIC’s xyz insurance scheme? This question comes to me many a times and I always suggest them few of my articles where I have shared the answer in bits and pieces but today I will answer this question with all the possible options and outcomes.
Let us begin with a very simple question which is why a need for insurance. The answer lies in any combination of the following options:
- Tax Benefit
- Insurance Benefit
I am sure your step towards insurance is guided by permutation and combination of above three options. Let us take each one of them one by one.
People make a mistake of investing in insurance for variety of reasons. I see many people give a very silly reasons like it makes them more systematic to investing on a regular basis and some have good genuine reason like they want a good solid lump-sum amount after an elongated time frame for some cause like marriage or child’s higher education…
No matter what your investment objective is, it should not cost you much and returns should be inline with other investment options available at your disposal. I am sure there will very few who would disagree on this and those who disagree are likely to be the insurance agents.
Now ask for yourself. Does your insurance investment satisfy the above criteria?
I don’t think so. Why? Because insurance as a whole has a cost of being insured as well as many other administrative charges which a normal investor is unaware-of. If you know the charges you will feel like killing yourself for it (Pun Intended). For majority of policies it is close to 20% of the premium amount.
The next category of people who invest in insurance is tax payers. Many fall into the trap of Insurance as an option to save tax. I have couple of questions for them:
- How much of your initial investment is actually invested?
- Which funds your policy invests into to get returns they quote?
The answer to first question is always close to 80%. This means out of one lakh of your investment you only invested 80,000.
The answer to second question is they list me few funds. I can invest in similar to those funds directly or choose even better than those funds. If you have an insurance policy which invests in few selected category of funds why don’t you select those funds on your own and save 20k Rs. If you want me to suggest few good funds for 20,000 I will give you 50% discount as well.
So next time someone asks you about insurance as a way to save tax don’t forget to ask him the two questions and then tell him bye-bye.
So what if you need insurance? Go for Term Insurance. Ask your broker to get you a term insurance. Nothing more nothing less. If he is one among those brokers who suggest products based on what commission he will get, then you can be rest assured he will not get you the Term Insurance. He will suggest you lot of products and even compare them how bad is term insurance for you and may go ahead to add few misinformation (See how here). He will even tell you that you will be paying the premium without any return but the reality is here you are paying the money knowingly and in other policies you will still be paying the same amount but unknowingly.
Again going blindly for term insurance is not what I advise but go for an all possible combination and calculation. Let us say that you go with term insurance coupled with some other investment. Consider all your expenses and see which one gives you maximum benefits with least possible expense. You will see that most of the time it will be non-insurance product that wins.
Insurance is something where you can live poorly so you can die rich and investment is something where you can build your wealth. Both cannot go hand in hand and so invest wisely. Share your thoughts in comments below.