Published in Mint on, Nov 06 2012, Written by Kapil Mehta
I am 45 years old and I have a term insurance of Rs.60 lakh. I bought an investment-linked life insurance with a sum assured of Rs.30 lakh last month. The only investment other than this is my provident fund (PF). However, I would like to start investing and would like products that give tax benefits. Are insurance products good investment options? My wife and two kids are dependant on me.
There are many reasons why people buy insurance. Sadly, most of them are flawed. Insurance often gets bought for tax benefits or investment returns, neither of which is its best use.
The most fundamental reason to purchase insurance is to assure your family’s financial security if an earning family member dies prematurely. This need is very well addressed by term insurance. Your sum assured ought to be 10 times your annual income.
The second useful aspect of life insurance is forced thrift. If like most people you need to be goaded to systematically save money, then insurance is one of your options. Insurers make you dizzy with renewal reminders and make it virtually impossible not to pay. But insurance is not the only option available. Systematic investment plans of banks or mutual funds (MFs) can also help you save systematically and periodically.
Investment and tax should be the third and fourth reasons to buy insurance. If you are purchasing a financial product for investment then compare the historical performance and cost structures across insurance, MFs and exchange-traded funds (ETFs). Get and compare illustrations of each of these products. Insurance should be considered only if you have a 5-10 years investment horizon. In your case since you already have an investment oriented insurance, consider other options to diversify your investment. I suggest that you include the tax aspect when evaluating the investment return across products. That will give you a holistic view of each product.
I believe that insurance-cum-investment products are not really great for the consumer. Is it true? Which category of people should opt for it and why?
There are two points of view on the issue of bundling insurance and investment needs. The first is that each need must be met independently and with the best product for that need. The other view is that bundling helps kill two birds with one stone. In part, because the adage seems inappropriate for life insurance and more substantially because bundling allows product inefficiencies to get hidden. I prefer keeping the two requirements separate.
I recommend that the insurance need be met by term plan. For investment purposes, you should compare insurance, MFs, ETFs and bank deposits to determine which meets your needs best.