I often come across people (most of whom are my clients), who say that they want good returns on their investment in insurance plans. The reasoning is, if they are paying for insurance, they not only get their investment back but also must get good returns. I’m sure, many of you think that way. There is noting wrong in wanting a good return out of an investment. Don’t we all want that.
But the problem is, Insurance is not an investment product.
It’s risk mitigation product. It is a financial product that provides protection and financial security to the insured’s family in case of unfortunate events like death or disability. While life insurance plays a pivotal role in safeguarding one’s family, it is essential to differentiate it from an investment avenue. Many individuals often confuse life insurance with investment, leading to misconceptions about the benefits it offers. Let’s just say, Insurance products are Wealth Protectors.
There are many kinds of insurance – Life, health, critical illness, motor, home, etc. For argument’s sake, let’s take the example of Life insurance. In life insurance, there are again many types – term plan, ULIPs, money-back, endowment, etc. I categorise these life insurance types into two types – term plan and non-term plan. I must tell you, I’m a big fan of term plans. Now, you may ask “why term plan. Term plan doesn’t give the money back at the end of policy term, let alone any return. I’d rather invest in ULIPS which is market linked”.
This is where most people go wrong. As I said earlier, Insurance is not an investment product, rather a wealth protector. Let me explain my point and also how you can optimise the benefits.
Why Term Plan?
Term Plan is a pure protection plan and not market linked. The premiums are very low as compared to other life insurance products. Compare this.
Mr. X is 25. He can get a coverage of Rs. 1 Crore with a premium of less than Rs. 10,000. But e.g. if he buys a ULIP with a policy term of 20 years and a monthly premium of Rs. 5000, the life cover may be less than Rs 4 lakhs. Since, he has “invested” in ULIP, he will get a return along-with a life coverage. Let’s say on maturity, at a 8% return, he will get about Rs. 28 lakhs. In the case of his unfortunate demise, his nominee will receive the death benefit as a lump sum payout.
You may say 8% is a good return. Rs. 28 lakhs is good return.
But what is the cost of this return? Let’s say he survived and invested the whole 20 years. That means in 20 years, he gets a profit of Rs. 16 lakhs by investing Rs. 12 lakhs – 133% return in 20 years.
Also notice that I mentioned 8% return and not 12% or 13% which is return offered by a index fund in long-term. This is because, the returns in ULIPs are generally on the lower side even if it invests in market. The reasons being, ULIPs promises a fixed amount whether or not it makes money. Secondly, the cost of investment in index is much lower as there is a capping. However, in ULIPs, the costs are much higher. This in turn lowers the returns.
Now, consider the alternative model to optimise your “investments”.
Let’s take the example of Mr. X. For calculations’ sake, he pays an annual premium of Rs. 12k on his term plan for Rs. 1 crore coverage. That’s Rs. 1k each month. In the previous example, he was shelling out Rs. 5k on ULIP. Let’s say, after paying Rs. 1k, he’s left with Rs. 4k. He decides to invest it in an index fund for 20 years. As I said earlier, returns on index fund generally is 12%-13% in long-term. Considering this, he accumulates roughly Rs. 37 Lakhs with an investment of Rs. 9.6 Lakhs. That’s a return of 385%.
With this alternative model, Mr. X not just increased his life cover, but also his returns. He got the best of both – Coverage and Return. Additionally, Mr. X can also get tax benefits not just for the insurance, but also for investing if he invests in ELSS (Equity Linked Savings Schemes) mutual funds. This model addresses all the components an individual needs – Coverage, Return and Tax Saving.
