Stop Listening To Your Insurance Agent’s Advice
Yes, You read the title right!
Now you might be wondering what might be the reason for saying such a thing. To understand this, you must first know the difference between insurance and investment.
First let us understand what do you mean by investment. Going by simple terms, investment means to put money into something expecting a profit in return. Now let’s move on to understand insurance. Insurance means protecting yourself from some unforeseen circumstances by paying a regular premium. If that unforeseen circumstance doesn’t take place, you get nothing. This is the purest form of insurance.
From what we have seen above, insurance is not an investment, and you should not mix these two together. When you invest your money somewhere, you expect something back. This is not in the case of pure term insurance. If you die, your nominee gets the total cover amount. If you live, no one gets anything. Now that may sound like a raw deal. But that’s what life insurance is all about! Ironically, life insurance is not about life, but about death.
In order to give something back, the companies offer the plans where you get something, even if you live. And the returns you get from here are so mediocre. Still your insurance agent will try to push these down your throat because they get higher commissions there.
Let’s take the case of two friends, Abu and Babu, both of whom are 30 year old males. Abu’s cousin is an agent in LIC. So he suggests him for a 20 year money back plan with ₹10 lakh cover. All Abu has to do is pay ₹6,587 per month for 15 years and he will be covered for 20 years with his nominee payable ₹10 lakh on his death (The question you have to ask yourself is whether this amount will be sufficient for your family to survive without you?).
Also in the meantime, Abu will also get ₹2 lakh at 5th, 10th and 15th year. Along with that he will be getting ₹12 lakh on maturity. In short, if he survives, he will receive a total of ₹18 lakh. Quite a cool return on his “investment”? (We’ll get to the returns a little later)
In the meanwhile, Abu’s friend, Babu, who is having some knowledge about personal finance, decides to buy a pure term plan with ₹1 crore cover. Considering his age, he gets a term plan around just ₹1,500 per month if he decides to pay for 15 years, and he will get a life cover of ₹1 crore till the time he is 60. Now he decides to invest the balance ₹5,000 in mutual funds for the next 15 years and lets the money sit for the next 5 years. Knowing that he can’t choose winning mutual funds on his own, he goes for low-cost index funds. Considering a conservative 12% return, his amount would have turned roughly into ₹42 lakh.
In case Abu and Babu of them die, their family members will receive the cover of ₹10 lakh and ₹1 crore respectively. If they survive, they will receive ₹18 lakh and ₹42 lakh respectively. (Remember, both of them had invested the same amount and for the same time period.)
Let’s analyze what kind of return Abu will get on his “investment”. I have taken annual amounts for simplicity. But, even if you were to take monthly amounts, there won’t be much of a difference. You can even try this for yourself using a spreadsheet.
That’s just 4.63% of return. Your insurance agent won’t tell you this. And even if you ask him, he’ll find some or the other reason to justify why this is the best option for you. Even if you account for tax benefits, it would barely beat the returns of fixed deposits. And worst of all, there’s no liquidity, which means you can’t withdraw your amount early. There is some fee which you have to pay for withdrawing before maturity.
I know that many of you would argue that the returns from the stock market are not guaranteed, or, that the stock market won’t give such a return (Let’s keep that topic for some another day). If you still feel that stock markets are not for you , you can still go for a pure term plan and invest the balance amount in PPF (Public Provident Fund). Currently, it gives 7.1% completely tax-free, and would easily beat the so-called money back plan, which is described above.
Whose path do you want to follow? Abu or Babu? I would sincerely request all of you to ask as many questions as possible to get all your doubts cleared to your insurance agent before putting in your hard-earned money into plans which do not even provide adequate insurance cover, and barely beat inflation.
It’s your money. Decide wisely!