We find thousands of crores of rupees being invested by people, in insurance policies every year in India. Is it wise? Sadly not, according to neutral opinion. Insurance is necessary to protect us against the risks to our life and property. But it is expensive and generally not a good investment vehicle. Insurance is only good at its job, which is to protect.

1. In the conventional plans, where the investment risk is borne by the insurance company, the money is invested conservatively, predominantly in debt and hence the returns are not likely to be good enough to beat inflation. We cannot hope to create wealth with such plans and they may, at best preserve wealth. The charges and expenses incurred are invisible.

2. In the Unit Linked Insurance Plans (ULIPs), the investment risk is transferred to the policy holder and he may decide how his funds are to be invested. But a major draw back to these ULIPs is their expenses. Typically, a ULIP incurs the following major expenses to the policy holder:

a. Upfront premium allocation charges: 5 – 60% of your premium depending on the term
b. Policy administration charges: A fixed sum every month plus a certain % of sum assured
c. Fund management charges : A certain % of the policy fund value
d. Mortality charges : This is to cover your life risk

Item a. goes to your insurance agent as his commission, whereas items b&c are towards expenses and profit of the insurance company. Only item d is for your actual insurance and serves your purpose. So, on an average about 8 to 12% of your annual premium would go towards charges and only the rest of the money would be invested on your behalf. These charges vary from company to company. ULIP policies take between three and five years just to recover the charges&expenses. You may expect any return only after that.

Another big drawback of insurance is the lack of flexibility and cost of exit. In case your financial circumstances change and you are unable to continue paying the premium, the policy may lapse or may be converted into a paid up, which is going to be a loss to you. And if your insurance plan is performing badly in terms of returns, you would have great difficulty in switching to better performing vehicles because of rigid exit conditions. Term life insurance is the cheapest form of insurance.

For example, a 30 year old healthy male can take a Rs. 10 lakh policy for a term of 20 years for as little as Rs.2,813/-. This of course is an expense. (If there is a claim, the sum assured is paid. No survival benefits. But then, the prime function of insurance is life cover). Where as the premium in any endowment policy would be Rs.28,540/- approx.

For a whole life policy it would be higher. You may simply opt for term insurance and invest the balance in other avenues convenient to you. With term insurance, you get a larger life cover for a smaller budget without committing yourself to huge premium year after year. And you may conveniently terminate the policy if you don’t need it any more. But then, has any agent talked to you about a term policy till now? Most probably not, because it is not in his interest!!

The next time your agent tries to hard sell an insurance policy (other than term policies), you can safely infer that he is, in fact trying to “insure” his family’s future with your money!! So the simple solution would be to take adequate term life cover and invest your surplus as per your financial plan, in other avenues like mutual funds, fixed deposits, small savings etc, which provide flexibility, easy exit, liquidity and better performance apart from being cheaper.

Do not mingle insurance and investment. Choose a horse that would suit the course. Happy and wise investing!