Do you buy a Life Insurance Policy as an investment? Read this! - Outside View by PersonalFN

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Do you buy a Life Insurance Policy as an investment? Read this!
Oct 31, 2014

"Good afternoon Sir, I am calling from XYZ insurance company, we have a very attractive life insurance plan for you." Doesn't this sound familiar? This is a typical phone call you may receive during the afternoon from representatives of insurance companies, urging you to buy an insurance policy from them. Most people usually get annoyed and ask the representatives not to ring them again. However, such phone calls continue and one day you finally give in and hear them out, probably because of the eager nature of the tele-marketers or to close out on your tax investments. The representatives paint a rosy picture of the features of the policy and entice you into buying the same. More often than not, they try to sell you insurance-cum investment policy which apart from protection also gives you returns. Since people see multiple benefits in these policies (risk cover, returns, tax benefits etc.) they opt for them willingly.

But should you buy life insurance policies as an investment?

At PersonalFN, we believe that one should never mix investments and insurance. An insurance policy should be taken only for protection purposes. Although savings based policies such as endowment, money back, ULIPs and so on provide returns to the holder; they are usually low when adjusted for inflation. Moreover, the premium for these policies is quite high and may be too expensive for your pocket. Hence, we believe that you must opt for term insurance as this is the purest form of life insurance policy and provides a high amount of coverage at a very low premium.

Another reason why one should not buy savings based policies is their illiquidity. Several such policies have long lock-in periods for redeeming your investments or high surrender charges for surrendering the policy which in-turn reduces the returns. Hence, in case you need your money due to some unforeseen emergencies, it may be very difficult to liquidate these kinds of investments.

The next question pooping to your mind must be "So then, where should I invest?"

As far as making productive investments are concerned, we are of the view that if you have a longer time horizon it is far better to invest your hard earned money in equity oriented mutual funds. As many people might not have the expertise or the time to research and invest in rewarding stocks, equity oriented mutual funds are good instruments to invest in. They not only have the ability to generate high inflation-adjusted returns, but also provide way higher liquidity as compared to life insurance policies. If you are concerned about tax-implications, then need not worry as the income arising on sale of equity oriented mutual funds are exempt from tax, if the holding period exceeds 1 year. However, you see, to meet your financial goals, it is imperative to choose winning mutual funds. You must consider factors such as performance, risk exposure, fund management, costs and so on while analyzing which funds to invest in.

PersonalFN is of the view that one should never get carried away by the sales pitch or the marketing strategies used by insurance agents. Instead you must first determine the amount of insurance that you need based on your family expenses, goals, loans and so on. Then choose a suitable term insurance policy from a trustworthy insurance company. Combining insurance and investments can not only be hazardous for your finances but also put your family's security in jeopardy.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "Do you buy a Life Insurance Policy as an investment? Read this!"

Ramarao

Oct 31, 2014

Excellent article.. All Insurance related savings products provide an effective returns of around 4%-5%. Most of the products launched have the condition of changing the mortality,fund etc etc charges after few years. This means the insurer can drastically increase these charges thereby reducing the corpus.. MF or direct equity/debt is a better option. Term insurance is the purest form of insurance and is the cheapest. Instead of paying Rs. 100 as premium towards traditional product, one is better off paying Say Rs. 10 as premium towards term insurance for similar sum insured and invest balance in the market directly or thru MF.

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