Over the years, an ever-increasing number of people have been buying insurance on the pretension of investment. There is nothing unique and new phenomenon in insurance market which is driven solely by insurance agents and their own drive to make more money themselves. Life insurance is one of the most of us vital need but it is being mis-sold and mis-bought as insurance- cum-investment something that is both expensive and complex. Problem lies not only misleading advertisements on financial products but also in our attitude and our belief system as we are conditioned to believe that anything which gives us some return is worth considering. This secret of this psychology of insurance buying that every agent and insurer understands that how the numbers are tweaked framed in such a way, that the insurance product looks very attractive as we get excited and not-to-miss an opportunity! Our young generation has been brainwashed by insurance agents into thinking that buying term insurance is waste of money that will not get anything back. This combination of factors the business model of insurance selling plus the insurance buyers’ hunger for ‘something back’ has resulted in a situation where even many money-savvy Indians are not thinking clearly about what insurance is, how it is different from investment and how they should best go about insuring themselves.

Let’s take a systematic, back-to-the-basics look at what insurance is and how it should be bought and compare this to investment. The purpose of insurance is to cover the financial aspect of risk. The risk can be of property, life, health, legal liability and of many other kinds. For instance, most of us life insurance has one purpose to replace an economic loss but it will never replace an emotional loss. The only logical kind of life insurance that makes sense is term insurance because only in that case are you are insuring against a risk that is insurable. The moment you buy any other kind of insurance, you are actually making an illusory investment that is disguised as insurance. It cannot for the purpose of your education savings and suffices for retirement funding or to provide adequate cover for victim family.

illusion

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The problem with buying investment disguised as insurance is that there are many flawed of insurance that are the most undesirable in investments. Let’s check out.

Illusory Return

The biggest illusion among the people about their insurance is that they are getting the right kind of return as they expected. Surely, it may sound like a raw deal. Suppose a persuasive agent comes to you and offers a policy to secure your future with sum assured of Rs 10 lakh in the premium of Rs 50,000 for 20 years. He tells you that you will get the sum assured of Rs 10 lakh plus attaching bonus which will get Rs 10 lakh (sum assured) + Rs 9 lakh as bonus combine Rs 19 lakh at maturity. Now, you just concentrate on ‘whole amount’ as you get but don’t know the returns. Actually, we prone to think that we will pay Rs 5 lakh, we will get Rs 7 lakh and the life insurance is additional or free, so we feel it’s a good deal. But we don’t think about the percentage return of this policy, at the end, on a compound per year, and then it turns out to be just 5.78%. It is imperative to know how much you have to pay over the years and what you will get from the policy in different years. Hence, the investment part of insurance offers only abysmal returns and provides low cover. This just doesn’t make sense and has to be lived out this illusory insurance arena.

Risk in Investment

While settling down any insurance product, we tend to think that every insurance policy is safe-haven product and do not involve any other kind of risk in insurance policy. This happens again because of not understanding the nature of investment and relying on the words of the person who sold it to you. We see many people complain about their investment worth going down in value compared to what they have invested. Say, a person pays Rs 20,000 per year for 3 years in a ULIP and after 3 years, his total investment is worth just Rs 45,000 only. While buying a ULIP, he forgets that his underlying investment was subject to stock market risk and bound to fluctuate. In that case, they are buying insurance as investment under the impression of non-risk element in the product and expecting a promising return in short term. In these cases, not understanding the final asset class where the money is being invested creates anomaly.

Hidden Costs

The commissions received by insurance agents are major pain point hidden costs for investors. When they are not aware of the costs and later they find out, they feel cheated. The commission costs are enormous generally around 20 per cent of first year premiums and 7.5 per cent in the second and 5 per cent from the third year onwards. For an insurance product that is supposed to be an investment, this is a shocking level. For example, when you invest Rs 10,000 in an insurance plan which has costs of 20% of first year premium, actually only Rs 8,000 will be invested and with 50% return, it would just be Rs12,000 translating into a 20% return on investment for you. However, when the same Rs 10,000 is invested in another plan which has 0% cost, then all Rs 10,000 is invested and even with 40% return, it will become Rs 14,000 and the final return for investor will be remain the same as 40%. Surely, insurance is necessary, but at these commission levels, it is a necessary evil.

Illiquid Investment

Since insurance is long-term product, no one should expect early withdrawal of money in the mid of tenure in the policy. The investment part of your insurance policy is locked in for enormous periods of time. When you buy insurance, you mean to lock-in your money till its maturity to get back your full payment. Though every policy has option to close the policy after payment of 3 years of premium, you will get peanuts of your total premium payment, if you need money in case of emergency. This means that if a policy has 20 years and you intend to surrender it in the 4th or 5th years, the surrender value would be around to 30-40% of your total premiums paid excluding the first year premium. In the worst scenario, there is no surrender value before 3 years. This means that if you want to close the policy before paying 3 year of premium, you would get nothing, absolutely nothing; it’s a complete loss for you. So, you should now realize that insurance with investment is totally inefficient in liquidity and with high-lock in period.

Conclusion

Principally, insurance is a way to financially true protection for your loved ones who survive you when you are no longer around them. It should not be considered as an Investment that gives you monetary returns while you are alive. Invariably when you buy insurance as investment, which will always provide you lower in return and insufficient life cover, which will be too little or non-consequential to satisfactorily meet your family’s financial needs after you are gone. Remember Insufficient Insurance is as good as NO Insurance at all.

While keeping insurance and investments separate, you should opt for one Term Plan to cover you up to the age of 65 at least. Rest all your surplus funds should be invested in other ‘proper investment options’ like FDs, PPF, Mutual Funds, Equity etc. Life insurance should be treated as expense say motor car and health insurance. Every year you pay the premium, but are happy when you don’t need to claim it. Invest and get insured, but separately even if the insurance agents vouch for the returns and show you all big complex numbers and illusory projections.

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Suresh Kumar Narula

SEBI Investment Advisor, Founder & Principal Financial Planner at Prudent Financial Planners
Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in
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