Is investment in insurance foolishness
Investment and insurance are two opposite sides of the same coin. If you try to club both insurance and investment, surely you will neither get adequate life insurance cover nor will your investment give you good return as compared to other investment avenues available in the same asset class. It is not prudent to buy any financial product without understanding the features of the product and cost structure attached to it.
If you are planning to invest your surplus money for future goals then compare the returns you may get from a particular instrument vis a vis other asset classes. But if you want to insure yourself then compare the features of the product (risk covered exclusions and premium payable to insure) across different life insurance companies. There is no insurance cum investment product available in India which cannot be beaten by two separate products and therefore it is always advisable to separate insurance and investment for better result. Everybody knows including IRDA chief that misselling is rampant in insurance products compared to other financial products as commission payable to the agents are higher. Another important thing is that you will never be able to cover yourself adequately if you decide to buy insurance cum investment product, as the premium will be surely higher than your yearly surplus available for investment. Let us understand all the three variants of life insurance products available in the market and compare them to other financial products available in the same risk category.
Traditional Plans: Endowment, money back and whole life plan come under this category in which investment decisions remain with the insurer. As per the guidelines given under insurance act, these plans have to invest minimum 85% in debt instruments like government and corporate bonds and only can invest up to 15% in equity. The combination is similar to hybrid debt oriented conservative plans of mutual fund popularly known as MIP funds. During last 10 years conservative MIP fund have given returns of around 10% p.a. On the other hand average bonus of LIC in last 10 year is Rs. 60 per 1000, means 6% return p.a. The bonus of private life insurance companies is much lower than LIC. Return of MIP fund is taxable but the impact gets reduced due to the benefit of indexation available for tax purposes. Considering 0.5% cost of insurance cover and 0.5% tax liability still you get 3% extra return if you invest in MIP plans which have the same asset allocation of debt and equity. Even if you invest the balance in PPF account after paying premium for term plan insurance you will get better return as compared to these insurance plans. The rate of interest for year 2012-13 is 8.8% in PPF.
Unit linked Insurance Plans: Unit linked insurance plans popularly known as ULIP are market related plans in which investment risk is borne by the policy holder. IRDA guidelines allow 3% charge for ULIP product of above 10 year term. Recently mutual fund expense ratio has gone up to 2.70% to 3% and that is almost similar to ULIPs. This does not mean ULIP has become better option. One need to compare the performance of funds in ULIP plans with the nifty index and performing mutual fund scheme. You will find that the performance of the most of the funds in ULIP is just around or below nifty index but much less than performing mutual fund schemes. Again if you separate your insurance need and invest in diversified equity scheme of mutual fund it will give much better result. Come 1st January’2013 and you will also get the option of direct plans where your charges in mutual fund scheme will come to around 1.50 to 1.75%. You have one more added advantage in mutual fund scheme, if your scheme does not perform well compared to its benchmark or its peers, you can immediately switch to other fund whereas in insurance surrendering will cost you as there are higher charges in the initial years which will reduce your available fund value.
Variable Insurance Plans: This is a new version invented in the recent past by insurers wherein features of traditional plans and unit linked plans are merged. Again there is no transparency in the plans like ULIPs. LIC Jeevan Saral plan is highest selling product in this category but it is surprising to know that first loyalty addition will be declared after a period of 10 years from the launch. The plan is launched in February’2004. It means people who have bought this plan still have to wait for another two years for the first loyalty addition declaration. There are few plans which declare guaranteed return at 7 to 8% p.a. in the beginning of the year. It is important to know that bonus declared in advance in such plan is for one year only and is likely to change every year.
Separating insurance and investment always benefits and it’s a proven fact. Term insurance is the simplest and oldest form of life insurance to cover one’s life and the easiest to understand. You do not have to calculate the charges and returns in this plan, as you know from the day one that premium paid by you is expenditure and nothing is receivable back. Term insurance is the least expensive plan to purchase the death benefit. Now online plans are available at very low cost. One should buy life cover equal to twelve times of annual income preferably through online route and invest surplus money in the other asset class on the basis of desired asset allocation depending on individual goals.