Money Tree

INVESTMENT PRUDENCE : GOING FOR LIFE INSURANCE?

Are you planning to insure your life? Great idea? But how do you choose your plan? Call an insurance agent and look out for the plans he suggests you and probably going for the one he recommends you or the one he sells you. Or may be you can call two or three insurance agents from different companies and end up choosing a plan that sounds best on paper.

Here I am going to tell you some facts which, believe me, no insurance agent or company is going to tell you, since they are selling insurance and perhaps what you need is an insurance cover with an investment plan.

Insurance is not an investment which most of the people think is and which most of the agents would love to prove, reason simple, they will only be able to convince you to shell out maximum from your pocket only when you believe that you are making an investment.

Strictly speaking insurance is an expense, an expense that you incur to buy a cover for risk on your life, but with passage of time and innovation of insurance companies, it is converted into an investment.

Now let’s find out how this mix of insurance and investment is used by the insurance company for your benefit.

In a pure endowment policy or a cash back plan the company would set aside an amount sufficient to take care of your life cover (Sum assured) just as in case of a term plan. Then it has to charge its management and administration expenses (including marketing and advertising) and lastly the most hefty part of it, the agent’s commission which in this case would be around 35 - 40%. And the balance, which roughly comes out to 52 - 57% of your first year’s premium is invested in Securities as per the plan of the company. Now with 50 - 60% of your premium being actually invested, how much return can you expect? Well, I assume, much lower than the rosy picture that was drawn by that agent. OK from second year onwards the agent’s commission would not be that much (2 - 7.5% means 80 - 85% of your premium will be invested)

Now consider this.

Instead of taking a mix of insurance cover and investment offered by the insurance company take only insurance cover from the insurance company and investment from the investment company. Why do we go to McDonald’s for burger and Dominos for pizza? Would you order a burger or a pizza in a South Indian restaurant or rather a masala dosa? So why make compromises with your hard earned money. Simply speaking if you want to take a cover of say Rs. 10 lacs and the premium in the insurance cum investment plan comes out to Rs. 40,000 per year, I would suggest you to spend Rs.1000 and take a term plan and invest rest of the money i.e. Rs.39000 in an investment plan suggested by your investment advisor or in a mutual fund or just put it in a Post Office Scheme. I bet you, in this case your returns will be much higher and the insurance cover will be the same.

Now on this your insurance agent might argue that you get rebate on the insurance premium paid to insurance company. However truly speaking, you can achieve same tax benefits in both the cases. Almost every mutual fund has a scheme on tax savings and all post office investments give you tax benefits.

The insurance companies counter this by coming out with equity linked insurance schemes but still there are expenses like agent’s commission (not as high as in endowment plans but still about 8 - 25%), which are higher than the expenses in other investment schemes.

So analyze, before investing, what is going to happen with your money. Ask questions to your insurance agent including his commission on the policy, don’t hesitate, he is supposed to tell you, and does he not ask about your earnings, just to estimate how much he can sell, so if you ask about his commission and other expenses that are going to be deducted from your premium, its fair enough, isn’t it?

Get informed and make a smart investment.