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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?

No, actually! 

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. 

Consider this:

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:

A sofa-cum-bed makes for neither an aesthetic sofa nor a comfortable bed. Separate out your objectives and spell out both requirements. The needs being different, the instruments optimal for meeting these are also different.

2 - Honour the purpose of Insurance:

In it’s purest form, life insurance is meant to offset the loss of income that you would have continued to generate had you lived.
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.

3 - Invest in a SIP:

Whatever premium you have saved by not opting for a complicated Insurance product, start parking it in a Mutual Fund that meets your risk requirements. At the very least, you will earn 6-8% in Debt Funds, and from 8-15% in Equity Mutual Funds. Over the same tenure, this comparable outflow can very well earn you anywhere between 2 to 6 times what you would have received at the maturity of a hybrid product.

Spelling out different needs and meeting them in the most efficient manner is something we take pride in helping our clients with.

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