Life Insurance as Investment is that makes sense??

Insurance is very important for every individual but is it right to mix it with investment products, different peoples will have different opinions lets understand the pros and cons of mixing insurance with investments.

1. TRADITIONAL POLICY GIVES LESS COVER

If we buy traditional investment policies the life cover offered by them is quite low as compared to buying a term insurance plan. Generally traditional plan offers 10 to 12 times life cover. So for example a person aged 30 years group wants one crore life cover, he may need to have policy of about Rs. 10 lakhs annual premium to cover that much insurance. Overall return of these products range between 4-6% P.a. Same person can get one crore insurance cover in Rs.12000-15000 by purchasing a term insurance cover. The remaining amount can be invested more smartly in other investment avenues where he can get 8-12% returns.

2. WE GET OBSSESSED WITH TAX SAVING

Another major reason for buying insurance is saving tax. Historically if we analyse the data, last quarter of the financial year gives as much business to insurance companies as the other three quarters together. In the last minute planning people buy insurance just to save tax; not for insuring themselves and without understanding the implications and future commitments, this results into lots of policy lapses later on.

If a person’s objective is to save tax then insurance may not be the best option for tax saving. There are various other instruments available which offer tax savings as well as better returns. PPF (8% tax free), NSC (8% but interest is taxable) and those with daughters below 10 year can even opt for the Sukanya Samriddhi Yojana (SSY) that offers 8.5% tax free.

NPS and ELSS can also be a good option for investors who are willing to take some risk. These two offers market-linked returns. In NPS the investment gets locked till retirement and only 40% of the corpus is tax free. In ELSS funds the investment is locked for three years and have the potential to give significantly higher returns, though the risk out there is also higher. For ELSS like PPF the amount received is also tax free

If we compare the returns of a traditional endowment plan with PPF and term plan combined or with ELSS funds and term plan combined we see the eye opening difference between their returns. If we assume a return of 8% for the PPF and 12% for the ELSS fund, both combinations would give far better returns and higher insurance cover to the buyer.

3. WHY PEOPLE STILL BUY IT

Although they do not offer very high returns but still people buy it mainly

•      High Commission to agents : As other products like term insurance and ULIPS offer very little commission compared to traditional products, agents always try to push traditional policies. Generally the agents are from some reference and people could not say no to them and buy these policies.
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•      They enforce a saving habit in the policyholder : These policies are generally for very long duration (20-30 years) and the agent keep on reminding (although more for their own commissions) to pay , Further people take it as a responsibility towards their families and afraid of losing money due to lapsation they keep it alive.
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•     Time value of money: Generally people don't realise that the huge maturity amount being projected may mean little after 25-30 years.  The Payouts in these polices are not given as lump sum but are spread across the years, which reduces the net return significantly.

4. SO WHAT SHOULD WE DO??

Well as mentioned above it is better to keep insurance and investments separately. Normally we should have insurance of ten times of our annual income (though it may vary based on future responsibilities and expenses). Term insurance can be a better option which gives a large coverage in small premium. The remaining amount can be invested base on a person’s risk appetite and requirements. For example if he needs to save more for tax saving under section 80C then for risk averse investors PPF, NSC or SSY are right options and for those who are willing to take risks NPS and ELSS are right products.

For general investments other than tax savings, mutual funds could be a good choice where a person can invest in Debt funds, Balanced funds and Equity based funds based on a persons need and risk appetite.

Every person should have insurance however the insurances should be brought for the main purpose of insuring the family towards some unexpected events not for tax savings or investment purposes.