Nitin VyakaranamArthayantra.com
Adequate life insurance cover is the most important aspect of financial planning. It is an efficient way of ensuring that the family will have enough money to meet their goals and maintain their life style in case of a mishap to the bread earner.
Life insurance is one of the most popular and misinterpreted financial products in Indian Market. It is often treated as an investment and the most efficient tax saving tool.
The insurance industry in India is dominated by three products: Endowment plans, money back policies and unit linked insurance plans (ULIPs). Despite the obvious benefits of term policies, they have always attracted lesser interest compared to the other life insurance products.
Also read: What is the best time to start a SIP investment?
The behavioral aspect of an average insurance subscriber in India is one of the primary reasons behind increased demand for insurance policies other than term insurance. We always expect “something” in return of the premiums being paid.
A term insurance subscriber should forgo the premium payments made whereas other insurance products pay the premiums back along with a premium rate. So, often people consider forgoing the insurance payments as a loss and ignore the benefits associated with term insurance policies.
Since other insurance policies promise a payback, it is considered as an investment which yields a return at the end of the tenure. This behavioral nature of the common Indian ensured that the insurance market in India is predominantly a seller’s market.
This also provides a way for agents to sell bad products in the garb of helping us. Insurance policies are “sold” in India, they are not bought. Eight out of 10 insurance subscribers in India end up with wrong products.
Insurance and investments are made with varying objectives. Life insurance is an effective way of transferring the risk. When we opt for an insurance policy, we are paying the insurance company to manage the risk of mishap to the breadwinner of family.
In case of any mishap, the consequences will be covered by the life insurance provider. While insurance policy negates risk, investments induce risk. The strategy behind handling these products should be different. Adequate insurance coverage in a cost efficient manner should be the motto behind opting for an insurance policy.
Steady returns which would help us achieve our goals should be the motto behind making investments. The investments should be made based on the risk appetite of the individual. The fusion of insurance and investments defies both the strategies. It results in higher insurance cost and lower risk coverage.
Apart from failing to provide adequate insurance coverage, wrong insurance products would consume majority of our savings. Since the returns provided by such products do not even match with the existing high inflation rates, it hampers our ability to achieve our goals.
Conclusion
A comparison of term insurance and other insurance products would give us more insights in this aspect. For a given insurance cover, the premium paid for a term insurance policy is significantly lower than the premium paid for other insurance products.
For a given amount, the returns from a well-diversified portfolio are higher than the returns received from the insurance products. The charges involved with the non – term insurance policies are also significantly higher. These charges have a major say in deciding the premium we pay for the life insurance and the related benefits. Don’t let your good money chase the bad money.
Always stay away from mixing investment and insurance. Always opt for a term insurance policy which provides adequate insurance cover in a cost efficient manner. The combination of term insurance and well diversified portfolio always ensures adequate risk coverage and good returns compared to the fusion of investment and insurance.
ArthaYantra.com provides online personal financial advice
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