Insurance Is Not Investment

Harshad Chetanwala
MyWealthGrowth.com

The understanding of insurance and its need has constantly evolved over the last few years and one can say that it is going through a transition phase. For years, insurance had taken a backseat because it was not considered as a necessity or something that is meant to cover risk.There are many who have taken up insurance like savings or investment where they are paying reasonable amount as premium for different insurance plans which offer maturity amount and limited insurance cover. Along with these are those who think they should get some benefit of paying insurance premium in case they survive till the end of the policy tenure.

Life insurance is to protect the family from the risk of financial loss in case anything happens to the bread-earner. Hence, the core focus at the time of deciding an insurance plan should be on how much insurance cover is good enough to compensate for the loss of income caused by the untimely death of the bread-earner. Any insurance amount less than the replacement of income will not help the family. This insurance amount should also compensate till the time the bread-earner would have been alive and actively working. For anyone who is earning, his or her insurance amount is much higher than a few multiples of the annual income. Let us try to understand this with the help of a few examples.

From the above examples, you can see how much insurance cover does one need at any point of time. This is considering that the claim from insurance is invested in instruments that generate 7 per cent return per annum. There are two kind of insurance products in India:

1. Pure insurance – only death benefit.
2. Death insurance along with maturity benefit.

The ones that offer maturity benefit can be predominately categorised as savings or investment insurance products. Saving products are those where yearly bonus or addition to the overall maturity are around the interest rate, whereas those products where the addition is higher than inflation can be categorised as investment products. Over the years, as these products evolved, it has become more of a saving product rather than insurance, though offered by insurance companies. Remember, your idea behind taking insurance is to cover the risk and not to park or invest money to generate return.

To reiterate, let your savings and investments in other instruments generate returns for you, not insurance. The elementary issue with insurance products offering savings or investment plans is lack of adequate insurance cover. A 35 year-old person from the above table who needs insurance cover ofRs1.75 crore to ensure sufficient protection for the family up to the age of 60 years can buy this cover by paying an annual premium between Rs22,000 to Rs27,000 depending on the insurance company. If the same person decides to go for savings or investment-driven insurance product by paying the same premium, the insurance cover offered by these products will be much lesser thanRs1.75 crore.

If anyone wants insurance of Rs1.75 crore in a savings or investment-oriented insurance product, the premium will be extremely high. Along with this, liquidity is another limitation where policyholders find themselves helpless if they need money or wish to exit these products. It is natural on our part to avoid thinking about an unfortunate event like death. We are all wired to think positively, but the essence of life insurance is to protect the family from the risk of financial loss. The emotional loss can never be replaced, but to replace the financial loss one needs adequate insurance cover and not just the maturity amount that covers one-tenth or half or one-third of the necessary insurance cover.