The 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.
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:
- Investment
- 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.
Investment
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.
Tax Benefit
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.
Insurance Benefits
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.
Final thoughts
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.
Yeah that too is an option, but people who are busy in their lives and
are not aware of various investments.. Investing in insurance is the
best option. This is my view, but everyone have their opinions.
If you cannot dedicate little towards making your money work for you, you are bound to be ripped off by sales people.
Dear Shabbir,
No,
I don’t think Insurance is an investment option. I have invested in
Life Insurance only to protect my family in case of any mishap of me. In
my experience the return from Insurance is very less compared to Bank
FD and other investment option.
Thanks and Regards
Ram
Yes insurance for protection is ideal but you should opt for term insurance over other insurance options.
good artical
Glad you liked it Sachin.
Completely agree with your point. This is the reason why I’m not much in favor of ULIPs, esp. single premium ULIPs. Term insurance plans bought at an younger age are the best option for insurance covers.
Shabhir,
I am naive/ ignorant when it comes to investements / insurances.
why cant insurance be considered as a pure investment option considering what is being offered for eg. SBI’s ULIP plan that gives you 3.5 times return on investment (SBI smart performer policy that gives you 3.5 lakhs on the 10th year with a 1 lakh single premium plan (company is considering an assured returns of 15% per annum) which is more than any investment stream I think). Am i missing something here to understand the hidden charges that you have mentioned (20%). Or do I actually get that return as claimed by the company in which case it makes sense to chose this as an investment option.
Thanks for clarifying
Appreciate your time and effort
Murali
Guys,
I am very naive and ignorant when it comes to investments and insurance. I am still questioning why it cannot be looked at as a pure investment option. Can you clarify this – when SBI insurance offers an ULIP plan with a single premium option that gives a min return of 15% (gives you 3.5 lakhs on the 10th year with an investment of 1 lakh single premium option – 3.5 times the invested amount which is higher than any other investment streams I think or am I missing anything to know that it is actually not so). Is it correct to assume from your commments that I dont get that amount after 10 years due to hidden charges close to 20%.
Appreciate your time and effort to clarify this.
Murali
Murali, This is all assured return of 15% and not guaranteed return of 15%.
Both Sachin and Shabir are write in their own contest. Since life is unpredictable, insurance is good in oneway(Supporting saching). where a person survives and look at his return on investment in insurance products, he laments having put in his valuable money in insurance since other forms of investments could have fetched much much better returns. SO EVERY ONE HAVE THEIR OWN WAY of investment and rightly it is their RIGHT. (FINALLY I AM A LAYMAN NOT AN EXPERT)
and yes shabbir is saying insurance is not an investment and accept it
Sachin Babu, insurance agent just like you, spreading the social corruption and every Indian has become corrupted in 60 years | and Shabir bhai, as you may also know they all are putting their own money in equity. Tell me brother, have you insure 50 million worth of car in 5 million ? then Why do you people hostile humans being.
much talk is nonsense, and you insurance agent are talking much…shut your mouth corrupted man
Agent says anything, but expert will tell you that real insurance is term insurance. Term insurance is really basic insurance. Other forms of insurance, such ULIP, Money Back, Group insurance, medical insurance, auto insurance, the pension plan came much later. All that term insurance is the origin.
Hey Sachin
Why are you so peeved ? Are you a self proclaimed financial guy or an Insurance agent……because nothing else explains your rant…
If you are uncomfortable with the views expressed by Shabbir…simply STOP READING
Shabir,
To give a financial services advice, one need to be qualified to do so. In US, unless a person do not have a requisite certification, he/ she is forbidden too give advice to public by any means. In india too, things are changing and soon there will be a strong regulation in this area and people who are not properly certified will be forbidden from giving advices- Online or offline.
Debt is good just to protect your savings. Equity for growth. So Use them appropriatly and get advantage of both. Challo, I am saying the same thing which I explained earlier becuase you do not have mind to understand the same.
Sachin, I am not sure if you are from US or UK but my disclaimer clearly says what I am and who I am. Now you mean to say US people are not allowed to blog about things without a certification? Haah. Check out my blog http://www.codeitwell.com and I have so many friends and people in US who are financial expert in online niche and they hardly have any eduction to back that up. It looks like you are mainly a bookish guy.
Now let us not deviate from the original context and as I told you why don’t you write a post explaining the benefits of Insurance and I will be more than happy to publish as guest post in your name.
I am anyway compiling this conversation into a post and will go online soon.
Shabir,
Debt may be useless to you but many people find it is very usefull atleast during market down turn which happened two years ago where debt instrument safeguarded capital erosion and offered many times more returns than equity. I think you are biased. I have no issue and it is up to you. The only issue is: WHY You try to impose your ideas ( acting as if you are financail expert by writing about it)to others. Internet is an open book. Many people write many things. I told you in the beginning, when you are not sure about what you are writiing then change your subject. If you think you are not an
expert financial analyst and not knowing much about debt, insurance and other financial produtcts then don’t write about it. Write about some thing which you know and you are confident about. If you think, debt is a useless one, then keep that thing with you why try to write just about one side. That is why I called MUNNABHAI finaical expert!!!
Internet is an open forum. Any one can come here and read. Some time people visit your site while searching GOOGLE. I intention is to keep readers away from misguiding facts mentioned in your article. YOU ONLY ADMITTED YOU ARE NOT AN EXPERT IN INSURNACE OR FINANCIAL SIDE. THEN, WHY YOU TRY TO CONVEY YOU HALF BAKED KNOWlEDGE TO YOUR READERS AND SPOIL THEIR STOMACH SHABIR?
READ MY COMMENT COMPLETELY BEFORE REPLYING.. READ MY PREVIOUS COMMENT ONCE AGAIN. I CLEALY EXPLAINED WHY I MENTIONED ABOUT CHILD EUCATION FUND. READ FULLY AND BE PATIENT SHABIR. “Now about the Child eduction which I see that you are trying to emphasize all the time is nothing but you estimate the cost of it after few years and invest accordingly to get that amount roughly.” You would not have written this sentence if you have read my previous comment.IT lok like you did not understand what I mentioned. Read again….!
Sachin.
Sachin, Again I am biased and if you think that debt protected 2 years back to people then I agree with you but now debt is the only thing which is killing. So there are 2 sides of every coin.
You are saying internet is open book and so I am fine with my idea that Insurance is useless and you are fine with your idea that insurance is few among the best investment option. I told my views and you have your own view.
Now I am not a financial expert does not mean I have no way to convey what I think is right and if you think you are the only person who is right and should convey things do start your own blog and do it. Did anyone stopped you in doing it. If you want to post something on my blog I am open to guest post as well. In fact I have plans to put this conversation in a post and let readers read it. I have nothing against you or any financial expert like you.
Again I am not trying to spoil anybody and I guess you are just the one who has this kind of views.
I do read all and is considerably good in understanding the English.
Shabir,
You said both! Let me copy your statement as it is written!
“I am again not comparing insurance with mutual funds. I am comparing the return on insurance with the return on insurance investment” ( You are actually comparing here!!!)
Why you are comparing the returns of both? Can You compare debt and equity? Just becuase equity perform many folds more than debt can any one say debt is a useless one? Traditional insurance is more secured and it is not meant for investment. Insurance is for protection. You said you are not comparing both but you have done exactly the same by comparing the returns of both!!! Remeber I said, not to compare Apple with an Orange!
As you said, if any customer takes insurance policy only for an investment purpose ( i mean with the intention of making wealth) or only for a tax purpose then that is wrong and I can only say that such thing happen only becuase of the ignorance of that customer. So if you are in a doubt, consult a qualified ( practically as an investor and academically) fiancial planner. I do nto understand why you try to become a Munnabhai type Financial expert? I understand your experience as a real time investor but that is not complete enough to advice people. That was I was trying to tell you.
Your suggestion : Combining term insurance with MF is a good combination but it is widely known investment practice and people know about it from news papers and other sources already.
Let me teach you other purpose of insurance. Insurance is very much needed to create risk free child education fund. Only MF SIP is not suffice to meet that challenge. One need to have a child policy seperatly along with a good SIP fund inorder to create a risk free child education fund.
Insurance is having an option where in case the payor is no more -due to sudden death or permannat disability-during the term of a child policy- the company is liable to waive all future premiums and take care the education fund for the whole period as if the premiums are paid in time. MF is good for wealth creation but do not offer this type of contigency services. So one need to have perfect combination of both.
Cheers
Sachin
According to me debt is useless if it cannot perform as good as equity based investment and I am not trying to become a Munnabhai financial expert or in fact I am not trying to be a financial expert any way. I am fine with what I am.
Now about the Child eduction which I see that you are trying to emphasize all the time is nothing but you estimate the cost of it after few years and invest accordingly to get that amount roughly.
You can manage that using your own way of investing and you do not need to be paying such high fees.
If you want paying those people such fees I am sure no one can stop you from that.
Shabir,
I think you are comparing apple with orange. You cannot say one is good or another is bad because Apple is an Apple not an orange. How can you compare ELSS with Insurance? Though both have an option to save tax. Remember, purpose of insurance is not to save income tax. Remember that. I think you think like a lay man. When you write an article about a financial product, you need to think like a knowledgeable person. Why I am saying this becuase many people think that insurance is meant for tax saving and they give more imprortance to that rather than looking for a protection.
Shabir, you said produts sold by insurance companies are good for companies not for customers. You are wrong! If that is the case, millions of people would not have taken endowment policies in India. It look like your are biased with mutual fund investment. Mutual fund is a great tool for investment. I do regular investments there. In fact, I am an AMFI member too. But how can you compare Insurance with Mutual fund. Both are different. It is like you are comparing two different things meant for different purposes.
Understand the difference between these two. I do have ELSS investment as well but I have doen that with certain objective in my mind. ( My financial goal) I do have endowment plan as well but I have a different objective for that. I do not believe endowment plans or any insurance plans are doing good only to insurnace companies. You are saying this out of your ignorance. This is not my opinion but that is the fact. I would like to know your credentials in MF and Insurance firt. Have you ever worked as financial planner suggesting Mutual funds or other investment products? I think your knoweledge in this area is limited to the extend as a customer not as a professional expert in this area. Remember, a customer may have a different views about different produts but that may not be always right becuase customers knowledge is limited to his experience with that product. This is where Certified Financial Planner prefessionals play a role in guiding customers to safe guard their future and investment goal.
I hope you have understood I explained above. If your knowledge is limited as a customer, then it is not ideal for you to advice people like this. If you really keen on advicing people like this then take up some international certification or any professional certifications along with some practical experience in financial planning and advisory.
Best of luck
sachin
I am not comparing Insurance as a medium to save tax but that is main reason majority of Indians invest in insurance.
I am again not comparing insurance with mutual funds. I am comparing the return on insurance with the return on insurance investment. I hope you know both are different.
If you have option of being insured and also get higher return by combining term insurance and mutual funds why on earth should you go with Insurance as a stand alone product and pay such a hectic price of 20%.
Again as a customer I suggests practical things which is near to real people and I don’t want to ruin myself like you by taking those paper which you term as certifications.
I never claimed to be a financial expert and I share thoughts my own way. Check out my disclaimer as well. Did I say I am a financial expert and planner?
Dear Shabir,
I read your article about Insurance. Like many people in the market,you have also mentioned insurance as a bad investment option.
I wonder why people like you say so. Rememebr one thing, people who design endowment produts ( traditional insurance plan) and Insurance companies who promote such products- including govet ownerd LIC- are not fools to design such products and market the same for the public. Those people are experts ( Insurance acturies of insurance companies and IRDA) in this field and obiviously have more insurance knowledge than a lay man like you. If only term insurance is good enough to take care all insurance needs(and all other products are not worth) then why the hell insurance companies spend so much time and effort to design and there after market such products in the market? Why does IRDA experts and acturies approved such products?
Shabir, this may be your view but that does not mean those produts are not worth to take. Let me ask you, can just a term insurance is suffice to serve all the purpose of insurance? The answer is “NO”.
Term insurance is only for insuring self. Insurance has many role to play in an individual’s life. Insurance is taken not only for just to cover the risk of a bread winner but also for ensuring disciplined savings for child’s education, marriage etc as well.
I request you to learn more about insurance or atleast take some useful courses in this field before going to write any artilce like this. Otherwise many of your readers will get misleaded with your in appropriate statements.
Good luck
Sachin
Sachin, Its great to see conflicting views but remember the experts (as you term them) are not paid because they have a great product for customer but are paid if they have a great product for the company.
Regarding Insurance let me ask you one question. Why on earth we are forced to do insurance. ELSS funds is out of Tax saving from DTC and now you can only save tax to the extent possible with Insurance. If it is that greater a product to serve your needs it should not be forced on to people.
Again I do not say that I am best person to comment on this but I am the right customer who has the right not to be fooled by this marketing gimmicks. Yes I am an equity investor but do you think that means I can be ripped off but these so called experts.
Term insurance is for insuring self and that way you insure yourself and for your other benefits you can invest at other places where you see more returns. Am I wrong in stating that?
Let me know your thoughts
Hi Shabbir,
Thank you for the great article.
I would like to share my experience with HDFC SL. As you said, they were indeed hell bent on selling the ULIP to me. No word was uttered about term plan. After initial inquiry, I got an excel sheet from them. It detailed charges, returns, etc. for HDFC Crest Plan with Free Asset Allocation plan where I decide which funds to invest in) and Highest NAV guarantee fund. The rate of return was projected to be 18% PER YEAR CONSISTENTLY for 10 years, for both the plans.
When I checked with NAVs on their website the NAV for Highest NAV guarantee fund had not budged for 5 years. I understood that this fund is a kind of hybrid fund where the manager invests major chunk in debt securities so that the maturity value will be as per projected returns and remaining in equities. No wonder the NAV didn’t rise.
Their only answer for 18% returns was it as per “India’s growth story”. I told them that even if my entire corpus is only in equities (in Free Asses Allocation plan), there are many diversified equity fund which have given negative returns (~ -10%) in the event of a crisis (as in 2008). All this was also a part of India’s growth (?) story.
Plus, charges in the 8th, 9th and 10th year (as per the excel sheet) came to above Rs. 49,000 per year (for an annual premium of Rs. 2,00,000 for the first five years).
Since this was my first experience with ULIPs (and I know it will be my last), I though of sharing with all readers.
I really agree, What the needs of that money your family get after your death and it is useless for you .Instead of that investment is something better than that of insurance.But investment is all about risk and return, and because your money is at more risk in the stock market than if you park it in a savings or CD (by the way, the money you invest in a CD is probably reinvested by the company offering the CD), the potential return is higher. It’s true that the gyrations in the stock market can cause both large losses and large gains, but if your investment time horizon is long enough, these short-term fluctuations will result in relatively high returns.
Really good explanation but how we came out from tax.Suggest which type of investment is good in future. Provide a forecast
THX
Dear Shabbir,
This was gr8 article which clearly conveyed the diff. between insurance and investment.
Thanks,
Deepak