Is Insurance an investment

I remember my teacher telling the story of intelligence when i was in school.  “There was once a student who prepared only one essay for his exam ‘Cow’ but was surprised to see that the essay which he had to write in actual exam was ‘Tree’, thanks to his presence of mind  he wrote There was a big tree near my home and a cow was tied to it, The cow was brown in colour and it gives milk everyday and rest wrote about the essay he prepared 🙂‘, Intelligent isn’t it ? ”

If i got it right you are thinking what this story has to with title of the blog. I don’t know how many marks the paper checker would have given this intelligent kid, but if I was in teacher’s shoes I would have given him 1 mark on a scale of 10 for his time. Now compare this to the plight of earning individuals who need a ‘Cow’ to meet their long term objectives like retirement, children’s education etc. but are being sold ‘Tree’ with the pretext of ‘Cow’ happening on the way.

I had experienced another situation where a bank manager forced me to take a life insurance as he had sanctioned me an education loan. In other words “Give and Take”. Why should I pay a premium of Rs 25000 every year to get some benefits when I die?. I promised him that I will take the insurance once I get the Loan Amount Cheque. I was somewhat luck that time. There was a continuous 2 days bank strike and he had to give me the cheque on a strike day as I had to complete my admission process that day. He came to my shop after couple of days, But I beautifully broke the promise as the cheque was already en cashed. The bank manager was literally crying.

With so many ‘advertisements and distributors’ making you believe that you will get rich by putting money in ‘life insurance’ ones inclination can be understood, but sorry to say this has never been a purpose of life insurance and moreover no historic data suggests that some one got rich by putting money in insurance. The only use of getting an insurance cover is to make sure that all your current and future objectives related to your family are taken care when you are no longer there to support them. In other words You are dead and your family needs support. Some of the learning points is listed below

• Term Insurance – The is a pure insurance product which is not an investment and is by far the best risk coverage available on the planet. Note that even traditional policies do not give you insurance for free and deduct mortality charges.
• Historic returns – Historic returns on traditional policies stand at around 6% only
• Do not get carried away when some one tells you that principle is assured – If you save One rupee monthly for 25 years in an investment which gives an assured return like PPF / FD, At 8% return and yearly compounding the total money comes out to be 900+ Rs (without considering any taxes) whereas your actual investment in this period was 300 Rs. So if you put your money in a product which has no proven upside and very low returns, even if you get your principle back you are still at a huge loss.
• Adequate coverage – For a person earning 5-10 lacs per annum , it is prudent to have an insurance cover of around 10-20 times of yearly income. If you want to have a insurance of 1 crore you need to shell out around 5 lacs via traditional policies. So the very year you are out of funds you are out of everything 🙂.
• Time Span – Most of  the traditional policies which are sold to you don’t even provide you insurance till you need it. You need to have a insurance in place which covers you at least till 60 years of age.
• Transparency & Liquidity– Traditional policies are silent on charges and returns and are completely non transparent. Moreover if you have not tried to surrender your policy ever , try once and you would be frustrated to know what you get.

Insurance industry in India was opened to private players in 2000 with a cap of 26% on foreign partnership. The cap was further increased to 49% in 2015. A very interesting & consumer friendly clause was also added as a law under ‘Insurance Laws (Amendment) Bill, 2015’  that “no claim can be repudiated (rejected) after three years of the policy issuance under any circumstances[assuming premium payments are never delayed by the consumer]“. I think its also worth a mention that Insurance is a business and no company is doing it for a only social cause hence law allows insurance companies to appoint private investigators for investigating early claims [claims raised within 3 years of policy issuance or within 3 years of a delayed premium payment], obviously if there are lapses found in the data declared the claims can be rejected completely or partially.

So if you have plenty of money then go for an insurance it gives us some confidence or else the best investment is Equity and Mutual Funds.

The above view is my personal view. Insurance sellers may have another view.

Learning Points Courtesy – Dream to Achieve Blog