Can I use Life Insurance as an Investment?

Ever wondered if you can use life insurance as an investment?? Well, you are not the only one seeking an answer.

Yash has been working for almost 4 years. One day his father asked him about his investments. Yash told him about the various life insurance plans he had bought.

Father  – “That is insurance. What about investment?”
Yash –  “But insurance works both as investment and insurance.”

Can I use Life Insurance as an Investment?

Insurance is mainly a tax saving tool for most Indians. If some “investment” component is added to the insurance plan it becomes like a dual benefit scheme.  Often the important aspect which is protection is overlooked due to the tax saving and investment aspects.

When buying insurance cum investment plans, not many customers really try and calculate the actual returns or read the fine print.

Clarity on the Purpose of Buying Insurance

Usually life insurance (not general insurance like travel, medical etc) products are assumed to be substitutes for investments as some products promise a lump sum at the end of the term period.

The idea of buying any insurance is to help the insured be financially prepared for any unforeseen event where financial loss is possible. Medical insurance will cushion the financial burden that will occur due to a medical exigency; life insurance policies are designed to protect the dependents of the insured against the loss of income.

A few aspects to consider when buying insurance:

• Insurance needs vary with life stages; for a young person with no dependants the life cover required would be different from a person who has a wife and kids.
• Insurance needs are also directly related to the lifestyle of the individual. The idea is that the family should be able to sustain a similar kind of lifestyle even if the primary/sole breadwinner is not there. Consider factors like loans, monthly expenditure etc when buying insurance.
• Another aspect to consider when buying insurance is the duration; for how long do you need the insurance cover.  This depends on the age of the insured and as well his dependents.
• Insurance cover (taken by a person) must be reviewed from time to time and upgraded as per changing conditions.

Insurance V/S Investments

The IRDA has made some reforms and has put a cap on the charges that are levied by insurance companies. It has done away with the old ULIPs which were front loaded; a large part of premium paid by the insured in the initial years was apportioned towards various costs; this left a small portion for actual investment. However a lot of people are still stuck with these policies.

Term plans offer highest insurance cover for the same amount of premium when compared with ULIPS, Endowment Plans or Money Back Policies. Though the idea of getting some amount at the end of “X” years sounds attractive it is not a financially sound decision.

A pure insurance policy like Anmol Jeevan by LIC for a 25 years for a non-smoker male for 10,00,000 cover costs Rs.5534 if the policy is bought at the age of 35. For an endowment plan like ICICI Pru Save ‘n Protect, the person will have to pay a yearly premium of Rs. 25,329, the Sum Assured is 6,88,000, guaranteed benefits of 101,496 and additional benefits of 245, 520.

Though there is promise of receiving a lump sum at the period in an endowment policy the SA (which is the basic purpose of buying a policy) is lesser. The differential of approximately 20000 yearly in premium can be invested by the customer at his will. Even if he chooses to invest it in a FD @ 8% the maturity amount will be more that 1,500,000 which is much more than what an endowment policy will give him

Endowment plan will charge more premium than the Term Insurance for same amount of coverage and duration since they will invest your money in other instruments after deducting the insurance, mortality and other charges and return some part of income to you on maturity.

A few issues with insurance being combined with investments are

• Most insurance products that promise to give returns invest in market linked instruments or sometimes in bonds; as an individual all these avenues are available to you. So why should you pay extra charges to the insurance company? If you are looking for expertise then there are mutual funds; if you are looking for safety then there are bonds.
• Historically insurance products have given poor returns; some even giving less than 2%. Here it is important to remember that tax benefits should be accounted for when calculating returns and the mortality charges should not be considered when calculating returns.
• Often ULIPs promise high returns and the insured may be lured into believing that his insurance cover is adequate (assuming a 12-14% growth in investments) which may or may not happen depending on market conditions thereby defeating the real purpose of insurance. For endowment policies also bonuses are not guaranteed and are paid only if the company is making a profit.
• Endowment and ULIPs are more expensive when compared with pure insurance as term insurance charges only for insurance while other plan charge for investment or protection also; there are charges like allocation, policy administration and fund management also.

Conclusion

The next time you think you can use life insurance as an investment … take a step back! Insurance should ideally not be mixed with investment and it should not be considered as a substitute of investment. Investments are made with a view to earn returns that ideally beat inflation; insurance products cannot be expected to do so as they are designed for a separate purpose. So next time you want to buy insurance, it is best to keep it simple and stick to basics.