If your Financial planner is not saying this, then you need to look for a new one immediately.

I met two such investors last week who seemed to think that Insurance is Investment, because they ‘invested’ in insurance policies. As that’s what they are being told or rather ‘sold’. Or maybe that’s what they saw their parents doing and they believe is the right thing to do.

So if not investment, what is Insurance?

Insurance is for protection, it’s a safety net for your family in case something untoward were to happen to you. It’s a protection for your dependents,  in case of your death. That’s the fundamental role of an insurance policy.

Whilst Investment is meant for building wealth, for yourself, your family, your future while you live. Both are mutually exclusive on many levels.

So can you do without Insurance? The answer is Maybe, if you do not have any liabilities like loan and/or if you do not have any dependents, then maybe you don’t even need to take an insurance policy. But however if you do have dependents, then it’s your duty to protect their interests and hence should take Insurance.

As a Financial Advisor, I would say, take a Term Insurance plan where you pay a small premium, cover yourself for any eventuality. This is what insurance is all about. You pay a premium for an eventuality. If the event doesn’t happen, you don’t get anything back. Just like in the case of vehicle insurance or health insurance. And if the event happens, your nominee gets a decent sum of money. The best part of Term Insurance plan is that the earlier you start, the lower you pay for the whole term. And hence you can take a fairly large life cover that will leave your family sufficiently comfortable in case of any eventuality.

But here lies the problem, we believe that a term plan is a waste of money as no money comes back if we survive the term. Do we expect any money back from our vehicle insurance or home insurance then why life Insurance? In order to save that small amount of money we end up paying huge premiums with the promise of getting the money back.

So here’s how it works, a typical policy provides life cover of 10 times the premium paid.

So for an Insurance cover of Rs. 1 crore, taken by a 32 years old person. with no ailments, no smoking habits.

Illustration

Age – 32 years,                                                                                                                                                                     Traditional

Insurance Cover Premium to be paid for a period of 10 years Maturity Amount to be received (after 15 years)
10000000 Rs. 84000 per month

Total amount paid = Rs. 10000000

15000000 to 22000000

(4% & 8%

HDFC Life Sampoorn Samridhi Plus. Endowment plus wholelife cover.

Upon this payment under Whole Life Option, in addition to the benefit mentioned above, a whole life cover equal to ‘Sum Assured’ shall be available after the policy maturity. Such whole life benefit shall be payable upon the death of the life assured after the policy maturity or upon the life assured surviving to 100 years of age, whichever is earlier.

Term Insurance Plan

Insurance Cover Premium to be paid for a period of 33 years (till he/she is working What you get Maturity Amount at the end of the term
Option 1

10000000

Maximum –Rs. 8000 per month

Total amount paid – 8000*12*33 = Rs. 3168000

Life cover of Rs. 10000000 till the age of 99  

Nil

Option 2

10000000

Approximately Rs. 24000 p.a. for a period of 33 years  (till he/she is working)

Total amount = Rs. 660000

Life cover of Rs. 10000000 till you pay the premium i.e. age – 65 Nil

HDFC Term Insurance Plan

So the question why pay Rs. 8000 per month or even Rs.2000 for the next 33 year and get nothing in return!

So here’s what you can do. You were ready to pay Rs. 80000 per month, right? So put the remaining Rs. 72000 in equity Mutual Funds via Systematic Investment Plan, for the same period of 33 years.

And what you earn at the end of 33 years @8% (considering the same as the Insurance plan)

Total Investment Your Earning Total SIP Value
Rs. 2,85,12,000 Rs. 11,15,38,615 Rs. 14,01,50,615

Source – HDFC Mutual Fund SIP Calculator

Yes! Your SIP value could be Rs.14.01 crores!!

Ok so you don’t want to keep investing for 33 years, how about 15 years? Then your investment looks like the following

Total Investment Your Earning Total SIP Value
Rs. 1,40,40,000 Rs. 2,53,16,928 Rs. 3,93,56,928

(Considered a conservative 12% as expected rate of return)

So really, how can Insurance be investment?  Don’t mix the two. They are at two ends of the spectrum. Be informed, invest wisely and make your money work for you optimally.

P.S – All illustrations taken from the websites of HDFC Standard life and SIP from HDFC Mutual Fund.

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