Investment and
insurance are two opposite sides of the same coin. If you try to club both
insurance and investment surely you will neither get adequate life insurance
cover nor will your investment give you good return compared to other
investment avenues available in the same asset class. It is not prudent to buy
any financial product without understanding the features of the product and
cost structure attached to it. If you are planning to invest your surplus money
for future goals than compare the returns you may get from a particular
instrument viz a viz other asset class. But if you want to insure yourself then
compare the features of the product (risk covered exclusions and premium
payable to insure) across different life insurance companies. There is no
insurance cum investment product available in India which cannot be beaten by
two separate products and therefore it is always advisable to separate
insurance and investment for better result. Everybody knows including IRDA
chief that misselling is rampant in insurance products compared to other
financial products as commission payable to the agents are higher. The another
important thing is that you will never be able to cover yourself adequately if
you decide to buy insurance cum investment product, as the premium will be
surely higher than your yearly surplus available for investment. Let us
understand all the three variants of life insurance products available in the
market compared to other financial product available in the same risk category.
Traditional
Plans: Endowment, money back and whole life plans come
under this category in which investment decisions remain with the insurer. As
per the guidelines given under insurance act, these plans have to invest minimum
85% in debt instruments like government and corporate bonds and only can invest
up to 15% in equity. The combination is similar to hybrid debt oriented
conservative plans of mutual fund popularly known as MIP funds. During last 10
years conservative MIP fund have given returns of around 10% p.a. On the other
hand average bonus of LIC in last 10 year is Rs. 60 per 1000, means 6% return
p.a. The bonus of private life insurance companies is much lower than LIC. Return of MIP fund is taxable but the impact
gets reduced due to the benefit of indexation available for tax purposes. Considering
0.5% cost of insurance cover and 0.5% tax liability still you get 3% extra
return if you invest in MIP plans which have the same asset allocation of debt
and equity. Even if you invest the balance in PPF account after paying premium
for term plan insurance you will get better return as compared to these
insurance plans. The rate of interest for year 2012-13 is 8.8% in PPF.
Unit linked
Insurance Plans: Unit linked insurance plans popularly
known as ULIP are market related plans in which investment risk is borne by the
policy holder. IRDA guidelines allow 3% charge for ULIP product of above 10
year term. Recently mutual fund expense ratio has gone up to 2.70% to 3% and that is almost similar to
ULIPs. This does not mean ULIP has become better option. One need to compare
the performance of funds in ULIP plans with the nifty index and performing
mutual fund scheme. You will find that the performance of the most of the funds
in ULIP is just around or below nifty index but much less than performing
mutual fund schemes. Again if you separate your insurance need and invest in
diversified equity scheme of mutual fund it will give much better result. Come
1st January’2013 and you will also get the option of direct plans
where your charges in mutual fund scheme will come to around 1.50 to 1.75%. You
have one more added advantage in mutual fund scheme, if your scheme does not
perform well compared to its benchmark or its peers, you can immediately switch
to other fund whereas in insurance surrendering will cost you as there are
higher charges in the initial years which will reduce your available fund
value.
Variable
Insurance Plans: This is a new version invented in the recent
past by insurers wherein features of traditional plans and unit linked plans
are merged. Again there is no transparency in the plans like ULIPs. LIC Jeevan
Saral plan is highest selling product in this category but it is surprising to
know that first loyalty addition will be declared after a period of 10 years
from the launch. The plan is launched in February’2004. It means people who
have bought this plan still have to wait for another 2 years for the first
loyalty addition declaration. There are few plans which declare guaranteed
return at 7 to 8% p.a. in the beginning of the year. It is important to know
that bonus declared in advance in such plan is for one year only and is likely
to change every year.
Separating insurance
and investment always benefits and it’s a proven fact. Term insurance is the
simplest and oldest form of life insurance to cover one’s life and the easiest
to understand. You do not have to calculate the charges and returns in this
plan, as you know from the day one that premium paid by you is expenditure and
nothing is receivable back. Term insurance is the least expensive plan to
purchase the death benefit. Now online plans are available at very low cost.
One should buy life cover equal to twelve times of annual income preferably
through online route and invest surplus money in the other asset class on the
basis of desired asset allocation depending on individual goals.
