Why You Should Stop Treating Insurance As Investment?

“Both terrorism and insurance sell fear -- and business is business” ― Liam McCurry, Author, Terminal Policy

This quote is self-explanatory to highlight the very basis of buying life insurance. But, what can be more ironical than the fact that life insurance is now days pitched as an investment, targeting the deep-rooted fear, which is “what will you get after death?”  It is obvious that anything that does not provide any benefit over your money is undesirable, and our return-prone tendencies veer towards those options that have something to offer to our family members or beneficiaries.

Know the facts
I recently came across an inquisitive client, who was bogged down by the idea that ‘Term Insurance’ is the most expensive insurance on earth. When explained that term insurance is the cheapest form of insurance to manage life risks for a pre-specified tenure, he enquired, what if he will die after the insurance tenure is over as he will not get his money back? However, there is nothing unusual in this question as most of the innocent clients are brainwashed by insurance agents in a similar way.

Answer is simple - Term Insurance is a cost to take care of one’s liabilities through their earning tenure. As far as ‘Benefits’ are concerned, there are other cost-effective alternative solutions such as mutual funds to meet return objectives. Life insurance buyers should not be influenced by only benefits, but should also consider other factors beyond it.

For example, premium for Rs 50 Lakh basic 25-year term plan cover for a 30-year-old non-smoking individual range from Rs 5,000 to Rs 12,000 annually. On the contrary, money back plan for similar cover will start from Rs 3,50,000 onwards for a policy term of 20 years. Similarly, annual premium for endowment plan for 20-year policy term starts from Rs 2,66,577 onwards.

Is the purpose solved?
Such a widening gap in premium between term insurance and conventional plans should be an eye-opener in itself. Second factor that is critical to examine is that steep premiums on traditional insurance policies often drive individuals to buy a lesser cover, which can lead to underinsurance or insufficient insurance. Under such instances, buying insurance does not fulfil its basic role, which is to cover fully against adverse events, i.e., risk management.

A 5 lakh or 10 lakh of insurance cover cannot repay an outstanding home loan of Rs 25 lakh if any unfortunate event occurs. Even this amount is insufficient to meet the living costs of beneficiaries for a reasonable amount of time till they find other income streams on their own. Now imagine how things will be if there was a term plan of Rs 50 lakh to 75 lakh in place.

Then came ULIPs
Just when investors were warming up to the idea of keeping investments separate from insurance, ULIPs (unit-linked insurance plans) made an entry, emerging as one answer to investment and insurance needs. Unfortunately, ULIPs route funds to investment vehicles only after applying list full of charges such as commission and mortality charges. Moreover, insurance companies are not transparent about revealing the actual sum that go towards life insurance and investment while shifting between investment options is quite inflexible too. Hence, it is very much likely that ULIPs can leave one both underinsured and underinvested at the same time.

Final word
Rather than depending on non-transparent means of investments, it is ideal that individuals should buy an appropriate term cover and invest the excess surplus in alternative investment vehicles that can deliver higher returns over a longer-term. This way investors will have better control on their investments and term plan will cover liabilities.
To reiterate, the role of term plan ends once an individual attains 60-65 years of age when liabilities such as home loan, education loan of children or any other debt usually stands repaid. Meanwhile, investments other than insurance become a source of fulfilling life goals such as retirement, vacations or children marriage. For those who are still seeing insurance as investment, it is high time to draw a line between the two.

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. Reenika Avasthi is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.

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