Deepak Yohannan of myinsranceclub.com explains on why insurance policy should not be used as an investment tool. It is best not to combine both the things and returns on insurance as an investment option will always be limited.
In India, insurance is viewed largely as a tax-saving instrument. People put aside money every year to "invest" in insurance. Sure, there are products like Unit Linked Insurance Plans (ULIPs) and Endowment Plans, which promise to increase your money by a higher rate than a traditional insurance plan would. But are these really effective tools for investment? This question comes up repeatedly in the field of insurance.
The aim of insurance
Before we answer this question, let us look at the purpose of insurance. Any insurance plan aims to protect you against financial risk. Life insurance helps you financially secure your loved ones in the event of your death. Car insurance ensures that a sudden collision does not leave you bankrupt. Adequate health insurance ensures that you never have to scrimp on medical treatment.
Thus, a good insurance policy is gold when it comes to risk protection.
Insurance as Investment
Things get a little murkier in the region of insurance as investment. Many policy buyers nowadays choose to overfund their life insurance plans. This is done in the hope of retaining the death benefit while also receiving an assured payout that can be withdrawn before the policyholder's death.
This is common enough in the case of permanent life insurance policies, where some of the premium payments are diverted into investments to build a corpus for the policyholder to withdraw and use before his/her death.
Naturally, the premiums for such policies will be higher than for traditional plans. Moreover, such an investment plan makes sense only for people who are in it for the long haul.
Should You Invest in Insurance?
If you do not trust yourself to make wise investments annually and to change your investment plans from time to time, an insurance plan may be a good savings instrument. By its very nature, an insurance plan forces you to save over several decades. It works for people who lack the discipline to save otherwise.
Nevertheless, it is effective only if you are able to continue the payments over the duration of the policy term. To discontinue your plan midway would be a bad call, particularly if you have been using the insurance as an investment tool.
Insurance vs. Other Investment Tools
Take the instance of the endowment plan. This kind of a plan came along because buyers of term life insurance plans were disgruntled at receiving no benefit at all on surviving the term.
What an endowment plan does is to provide a death benefit as well as a maturity benefit. If you survive the term, you will receive an accumulated amount. However, the premiums are considerably higher than in traditional insurance policies.
The question you should be asking here is whether the returns on an endowment policy (or on a ULIP, if you prefer) matches up to the returns on a strong mutual fund. Unfortunately, insurance is a poor performer when compared to mutual funds and other traditional modes of investment.
The lump sum payout that you receive at the end of the policy term will form only a fraction of what you could have earned had you diverted your money elsewhere.
In conclusion, it is best not to combine insurance with investment. Insurance can be used for investment, but the returns will always be limited.
The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portalYou can now invest in mutual funds with moneycontrol. Download moneycontrol transact app. A dedicated app to explore, research and buy mutual funds.