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Insuring Our Wealth

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Buying life insurance with an intent to invest harms more than it helps

By: Tavaga Research

Every marketing student in India is made aware of the hurdles in selling insurance. People don’t want to contemplate their own mortality when buying something. Low life insurance penetration corroborates it.

But when it comes to those who have set aside such inhibitions, life insurance has come to mean a host of things. Not only does it look like a way of ensuring financial security for our dependents, but it can also even seem like an investment option. 

But ‘seem’ is the operative word here. In the sea of endowment plans and ULIPs (unit-linked insurance policy), coupled with the odd parental advice, a young investor can often fall for the sales pitch of marrying life insurance with investing.

Insurance, of any kind, should not double as an investment. We should consider spending on insurance before we arrive at our investable savings.

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If we don’t have dependents, including our parents who might be financially independent of us, we don’t have to consider life insurance as a must-buy. Health insurance will serve us better even if our workplaces cover us with their group health insurance. A personal health insurance policy will stand guard for us in between job switches and can be handy if we were to float or join a start-up someday.

When we do take out life insurance in our names, opting for combo products such as endowment plans, which promise a bonus from time to time and the money back after a period of time, even if we are alive, or a ULIP which invest some of the premium in money market instruments, is counterproductive.

Calculations will show us the returns and time taken to earn the amount afforded by such combination products that can be obtained through true-blue investment products. Even then, why not go for a one-stop-shop solution if available, one may ask.

Because such combination products end up defeating the purpose of both insurance and investment.

We end up paying a lot more in premium to ensure the same cover as compared to a vanilla term insurance plan. We do it for a long period of time, all the while forgoing the money that we could have orchestrated to make the most of the economy. With most investment products, we can take out the money if we need to or for reallocation.

The returns from insurance plus investment plans effectively work out to be in the same range if not lower as fixed income savings and debt products. Fixed income savings such as PPF (public provident fund) let us save on taxes as well, just as some insurance products.

Instead of paying high premiums for half-baked insurance, we can instead earn better with equity ETFs (exchange-traded funds), for example, if we have a high-risk appetite. There are bond ETFs for those of us with a lower risk-taking mindset. 

1-Year Performance of Bharat Bond ETF – April 2030

Performance of Bharat Bond ETF
Source: Google Finance | Data Updated as of 17th July 2020

Opting for term insurance plans, if we must, frees up our capital for more rewarding ways to earn wealth, while safeguarding our dependents in a robust manner. 


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