Is Your Insurance Premium Buying You What You Need?
If I can have both, insurance and returns from a single instrument, shouldn’t I grab the chance?
One of the prime concerns of anyone taking an interest in investing is to create a safety net for their dependents. So naturally, insurance becomes important rather early in the game. Presently, several hybrid products seem to offer not only insurance against a loss of life, but also provide decent returns if one happens to survive.
The idea of getting a sizeable chunk of your money back, with the probability of an added bonus makes such products seem like a great deal. After all, we all want to live longer AND be richer for it! But in reality, all that glitters is not gold.
Your Insurance Premium is used in primarily 3 ways:
- Administration Costs, Commission and other expenses.
- Mortality premium
- Investing for returns.
What is left from your premiums after accounting for the first 2 items will be invested. Typically, the highest commission (around 15 – 35 % of your premium) is paid to the agent in the first year. This percentage gradually tapers down over the term of the policy. So smaller amounts are available for investment early in tenure. (This means that you lose out on the compounding effects that a S.I.P. would have earned on a similar cash outflow.)
Further, there may be a cap (of about 8-10% of your entire premiums) that may be invested in equity.
What this means is that only a small fraction of your premium will actually be invested and that too in low-returns investments, in a gradually growing manner. (But your high upfront premium policies are certainly incentivized for your agent.)
So how does one go about de-risking our dependents while also enjoying good returns during our lifetime?
1 - Don’t confuse your objectives:
2 - Honour the purpose of Insurance:
Get a simple, clear Term Insurance. Pay the affordable premium and don’t worry about the returns you could have made on this amount. This premium is buying you and your family its peace of mind at a nominal cost. You also have an option of revising the sum assured every decade or so. Typically, income follows a rising graph, flats out and then drops over a lifetime curve. Routinely revising the sum assured reflects our exposure realistically. Further, insurance premiums are also more easily absorbed as they follow our earnings curve.