“Insurance for investments” – Is it a good or bad choice?
Let me start with a Car Policy.
What are the benefits in your Car Insurance Policy? You can make a claim, if there is a car accident in that year and you need not spend money from your pocket for the repairs. If the car is stolen, then also the Insurance company will make good your loss. But if there is no claim, in that particular year, then you stand to lose the premium paid! Still you insure your car for the next year. Why?
We don’t know when a claim can arise in this Car Insurance. In such a situation, the only option is to take Insurance every year and buy peace of mind. If there is no claim, then no issues, but if there is a claim, the insurance will take care. So, we all insure our car, before we take delivery of the car and continue to renew the insurance every year.
But coming to Life Insurance, we don’t believe in this. Going by the above logic, we should prefer Term Insurance policies where the policy amount is payable only in case of death. In such policies, the premium rates are very low.
Let us see an example:
If you are aged 30, you can insure your life for Rs. 1 Crore by paying an annual premium of around Rs. 10,000. By paying this amount every year, you can ensure that your nominee will receive Rs. 1 Crore, in case of your death before age 60.
But you will not get anything from the insurance company, if you cross age 60. You will lose the premium paid for 30 years. In this example, you will lose Rs. 3 Lakhs in 30 years!
So, you will not buy such a policy. This is what is happening now.
Now what is the new technique of Insurance companies?
Insurance companies have started selling Savings Linked Insurance Policies to attract customers like you. In such policies, you will get maturity benefits also. You will not lose your premium like in Term Policies! Endowment Policies are the most popular form of this.
Is it good for you?
If a 30-yr-old person is taking an Endowment Policy of LIC for 30 years for Rs. 5 Lakhs, the annual premium will be Rs. 15,038 as per LIC website.
What are the benefits in this policy?
At the end of 30 years, he will get the sum assured of Rs. 5 Lakhs and Bonus for the 30 years. As per the current rate of Bonus of LIC, he will get Rs. 7.2 Lakhs as Bonus after 30 years. So, he will get Rs. 12.20 Lakhs (5 Lakhs + 7.2 Lakhs = Rs. 12.20 Lakhs). This is a CAGR return of 6.1 percent. Some banks are offering 6% even in Savings account. The bonus is not guaranteed and it will depend on the performance of the company and declared every year.
What happens in case of death anytime during these 30 years?
In case of death anytime during these 30 years, the nominee will get the sum insured of Rs. 5 Lakhs and the Bonus till date. For example, if there is death in the 10th year, the nominee will get the Sum insured and Bonus for 10 years. As per the current rate, it will be around Rs. 7.4 Lakhs (Sum insured of Rs. 5 Lakhs + Bonus of Rs. 2.4 Lakhs).
But what will his nominee do with this Rs. 7.4 Lakhs. It will not be sufficient to pay for the hospital bill.
So, this policy is not going to help him in any way even in his absence.
Why Insurance is bad for investment?
Offering a CAGR of 6.1 percent for a 30-year investment product is not acceptable to any prudent investor. Even PPF offers 8.7% returns now. Offering a small Life Insurance cover is not a genuine reason to buy such a product.
Such policies neither offer decent returns nor do they offer sufficient risk cover for the policy holders. The policy doesn’t offer any flexibility in investing. Once you join the policy, you have to pay the premium for the full term. If you want to exit, you will get only surrender value and you may end up in a loss too.
It will be better to go for Term Insurance policies to get a decent cover to protect your family in case of a risk. You can invest the balance amount in PPF or in Mutual Funds for better returns. These are flexible investment options to suit your convenience.
Money Back Policies – Is it better than Endowment Policies?
The answer is No. This is because the premium for Money Back Policies is higher than that of Endowment Policies. The attraction of Money Back Policy is that you will get Survival benefits at the end of 5th, 10th and 15th year as per the policy conditions. Even after the Survival Benefit Payment, Life Insurance cover will be for the full sum assured. Still the high premium makes it less attractive as an investment option.
Whole Life Policies – Is it a good option?
You should have life cover till you have some financial liabilities. You should have Life Insurance till your children are dependent on you. Normally, when you are aged 60, you will be retired and all the financial commitments are discharged till then. In that case, there is no need for Life Insurance cover after that age. So, it is better to select a policy which will cover you till the age 60. Going for a Whole Life Policy will not be good from the investment angle because of the very high mortality premium at advanced ages.
What about ULIP? Is it a good investment?
Again No. This is because of the various charges in the ULIP policies. In ULIPs, there are many charges recovered from your invested amount. They are
- Premium Allocation charges
- Policy Administration charges
- Mortality charges
- Fund Management charges
In the case of Mutual Funds, the only charges are Fund Management charges. Mutual Funds are flexible and you can decide to continue or stop further investments any time. But in ULIPs, once you join, you have to hold on for at least 5 years, even if the Fund performance is not good. This makes Mutual Funds a better investment option compared to ULIPs.
Insurance for Investments – Which is better for you?
Insurance policies are not good from investment angle with very low returns. Bonus rates are coming down year after year and this will make the policies unattractive. The Bonus rates of most of the private companies are very low compared to the current LIC rates. It will be better to go for Term Insurance and invest in good investments for better returns.