Thursday, 16 April 2015

Life Insurance: Your first investment towards your family.

      Believe or not but life is uncertain and one must have Life Insurance because you leave not your family. In today’s world no relative will support your family for life time but your Life Insurance does.   Imagine a 35 year old young only earning man left forever with 2 kids and wife and parents behind. Did he earn enough for his kid’s future? Indeed money cannot fill your absence but still it helps your family to survive.


One old saying about insurance is that “Buy Insurance when you don’t need it because when you need it you will not get it easily” So buy it as early as possible.

Now question comes which Insurance policly you will buy?

There are mainly two categories of
Life Insurance :

A.Term Insurance: Which provide only death benefit , no return on maturity

B.All other: Which provide Death benefit and return on maturity

Now when it comes to buy Insurance most people prefer Money back or endowment plans as they want return from their money. Though insurance is primarily a risk mitigation tool, many people use insurance for the purpose of long term investment. These people buy endowment and money back plans sold by insurance companies. Why it is that insurance is used for investments? There are two reasons for this- 1) Insurance agents mis-sell insurance as they want to get maximum commission and 2) People buying insurance feel it is a good return option along with insurance cover. However, most of traditional insurance products don’t provide returns even close to other traditional investment products like PPF, Bank deposits etc.

How do you know what is the return offered by the insurance product that you have purchased? If you ask a person who has purchased an insurance product about the returns, he will not be able to give answer to this question. So how do you calculate returns offered by the insurance policy? Let me take an example. Suppose you have purchased the following endowment plan:
  1. Policy Term 20 years
  2.  Premium Payment annual
  3.  Premium amount 25000 per year (Assumed)
  4.  Sum Assured 5 lakhs
  5.  Maturity value (Sum Assured plus Bonus)
  6.  Bonus: 3.5 lakhs (Assumed)

 If we calculate premium of 20 years it stand 8.25 lakh while return you get will be 8.5 lakhs. So your return stands around 5.26%. In case of death you will get Sum Assured and Bonus (if any). Does it worth??

 Now take example of Term insurance Plan:

  1. Policy Term 30-35 years
  2. Annual premium: 6000
  3. Sum assured: 50 lakhs.

If we calculate total Premium for 30 year that it will be 1.8 lakhs. By paying 1.8 lakhs over 30 years you secured the future of your family.

People argue that there is no return on term plan where money back policy provides them 6-8% return.

 Let now take another Example to overrule this myth:

Person A: Buys Money back plan with premium 25000 and sum assured of 10 lakhs. He will get assured money back with 7% return on maturity of 20 years.  So after 20 year he will get around 5 lakhs of Sum assured and around 5.9lakhs of interest on it. Sounds good. Wait but what about tax?? Yes mostly this money back police show pre-tax return. One has to pay tax on interest amount. Assuming 10% tax on interest so final interest amount will be around 5.4 lakhs.

Person B: Buys Term Insurance with premium of 5000 and sum assured of 50lakhs on death for 30years. So as compare to Person A person B pay 20thousand less yearly. Now Person B opt PPF account and placed 20thousand yearly in it. So now Person B is paying 1.5lakhs over 30 years with no return. Now what he get from PPF over 20years lets see:

Annually ROI of PPF is around 8.7% which is also compounding so after 20 years   he will get 10.75lakhs which is tax fee also.

Other than PPF, there are many good Mutual Funds which has past record of 10-15% returns annually.

Simply we can say Term Insurance is only insurance that one should opt if you want return there are many other products available with great returns

In conclusion we can say one must not mix Investment and Insurance. Both are different and essential product. One must have both in pocket.

 Be Smart. Invest Smartly