First things first. Insurance is NOT Investment and vice versa.
Human tendency to combine both doesn’t work well. Products like ULIP, which combine both the elements also haven’t worked well.
Most people want to “get back something” from a life insurance plan. However, they don’t think the same way when they are buying insurance for their car, house or other assets. If you’re willing to spend and buy pure risk cover for your property, why not for yourself?
Financial planners have been crying themselves hoarse about the wisdom of buying a pure term insurance plan and using the remaining amount for investment. The dual advantage of cheap risk cover and earning much more on your investments can’t be ignored at all.
Let me list the 3 major pitfalls of investing in a insurance plan.
1. Abysmal Returns:
Insurance companies and agents never speak in plain terms about return on investment. The reason is that the returns are abysmal.
They keep harping on tax benefits and the absolute amount that you’d receive after 25 years (or whatever the term is) and the assured returns, annuity, etc. But what they conveniently conceal is that insurance companies have traditionally delivered only 4-5% returns to their customers.
Can you imagine what 1% extra return over a period of 25 years can cost you?
If you invest Rs 50000 every year, at 5% returns, you will get Rs 23,86,355/- after 25 years
And with the same amount, at 6% returns, you will get 27,43,225/- after 25 years
1% difference in returns results in an absolute change of Rs 3,56,870/- over 25 years.
Can you imagine what would happen if you purchase a cheap term plan and invest the remaining amount in an Equity fund SIP which gives an average return of 12% p.a. over the next 25 years as against 5% from a traditional insurance plan?
Let’s assume you purchase a term plan with sum assured of Rs 1 crore. Assuming you are a non-smoker around 30 years of age, your premium should be approximately Rs 10000/- p.a.
Continuing the above example, you invest Rs 40000/- (Rs 50000 – Rs 10000 for term plan) every year in a equity mutual fund giving an average of 12% returns per annum.
You will get 53,33,355/- after 25 years. From this, you may deduct Rs 250000/- (10000 x 25 years) which is the total premium paid.
Even then, you are gaining 50,83,355/- at the end of 25 years. All this, while you enjoy a much higher risk cover.
2. Inadequate Risk Cover:
The second pitfall is that because we have the tendency of “wanting something back” the risk cover is grossly inadequate.
Families with loans or other liabilities will find this to be a glaring difference in case the breadwinner suddenly passes away. The surviving family will be left saddled with debt while the insurance cover would be insufficient to cover their liabilities.
And so, it becomes all the more important to have sufficient insurance to cover all your liabilities and your family’s future plans to financially compensate for the breadwinner’s absence. This is only possible when you have a cheap insurance plan where the premium is less and sum assured is high enough. Term insurance plan wins hands down.
3. Reduced Income for Investment:
Since you would be spending a high amount for premium in a traditional insurance plan, there is very less money left for any further investment. As discussed earlier this is a double whammy. One one hand, you are not having sufficient risk cover and on the other hand you are losing potential returns.
Avoid the pitfalls. Be wise..
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