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.
- 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.
- 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.
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