There are various insurance policies prevailing in the market that promise to behave like an ultimate plan of investment cum insurance. However, you need to understand the different alternatives available for the purpose of investing, which totally don't need insurance plus an investment plan to create wealth.
Let's understand the concept by taking an example of a guaranteed money back insurance plan.
What is a money-back plan?
A guaranteed money-back insurance plan in India is a type of life insurance policy that promises to return a certain amount of money at regular intervals throughout the policy term. This means that you will receive a portion of your premiums back, typically every five years, regardless of whether or not you make a claim.
For example, if you have taken an insurance policy in which you need to pay ₹10,000 per month for the next 10 years as a premium with a life cover of ₹12 lakhs. You will be getting approx ₹24,000 per month as guaranteed money back.
How much returns do they generally give?
Typically, the money-back plans give annual returns of 3-5 percent, which is nowhere beating inflation prevailing in the economy these days and in coming years as well. You may argue that it has other benefits like tax savings and annual bonuses in the case of LIC.
Let's first talk about the tax part; if you are looking for tax-saving instruments, various other options can provide better returns and tax savings under section 80C. Tax planning should be part of a personal financial plan, but it shouldn't be the reason for investing in loss-making investments.
When we talk about the bonus part, it could not be received in your bank account or in your hands. It will be added to your insurance policy only. You will get the benefits of a bonus at the time of maturity only. Also, insurance companies are not bound to pay bonuses.
So what? You shouldn't buy insurance?
You need to understand the difference between insurance and investment. Life insurance is just a part of your personal financial management which has to be done to protect you and your family in the case of your absence. There are two primary points that you need to consider before buying any life insurance policy-
- Sum assured must be 10x of your current annual income, which gives your family financial protection in your absence to maintain their lifestyle.
- The claim settlement ratio of the company must be as high as 99 percent, as there would be zero chances of your family not getting the benefits of life insurance.
When you invest in insurance policies by thinking of it as an investment, you will be more likely to ignore real investments like stocks, bonds, or even FDs, to avail of inflation-beating returns.
Wealth creation should be a different objective than protection
Life insurance will not be able to create wealth for you as they are dedicated to protecting you and your family financially. A well-diversified investment portfolio will help create wealth if you stay invested for a more extended period.
For example, if you invest in SIP through mutual funds, you can fetch up to 20% of returns when markets are bullish and buy additional units of valuable companies when there is a bearish market.
Term insurance policies would be a better idea if you are looking forward to protecting your family in your absence, and it is necessary to establish a proper differentiation between insurance and investments to make the most of your personal financial plan.
Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com
Disclaimer: This story is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment-related decision.