‘Investment in insurance’. Why it may disappoint you?

Investment in insurance

An insurance policy traditionally meant that you pay a premium to the insurer who in turn agrees to undertake a guarantee of compensation in case of an unfortunate event. The above is still widely prevalent due to its popular nomenclature. But insurance trends today are on a different track. Products like ULIPs (Unit Linked Insurance Plans) offer an individual both insurance and investment under a single integrated plan. Due to the increasing popularity of ULIPs, this is where the investor started assuming that they were being benefited doubly.

While investments and insurance are two different concepts altogether, nowadays the latter comes with the mix of providing risk cover as well as some single-digit returns in the form of products like ULIPs. The prospect of being insured and invested for opportunities through a single outflow of a premium is what attracts the customer.  However, here is where an important question arises. Is it wise to mix investments with insurance? The alternative we suggest which would also enable you to make money from the markets along with getting a sufficient risk cover at significantly better terms. A combination of investments in Mutual Funds along with taking a Term Insurance Plan would go a long way in achieving an individual’s goals and aspirations along with protecting oneself from unforeseeable events.

 Before evaluating that, let us explore a few features of ULIPs in insurance and Mutual Funds in investments.


Investment in insurance

There are several ULIP policies offered combined with complicated terms and conditions. In these terms & conditions are where all the charges accompanying the plan are mentioned which are usually ignored. Charges like the premium allocation charges, policy administration charges, mortality charges, management charges, surrender charges are included just to name a few and the list goes on. The actual realized gain is far lesser than the policy returns since the gains are vastly eaten up by these expenses.

Also, the risk cover that these policies provide is not sufficient to cover the loss of life. The minimum life cover or sum assured in ULIPs, as per IRDA regulations, is 10 times the annual premium for investors below the age of 45. So, the sum assured received by a person is limited to his capacity of paying premiums.

Let’s take a look at an illustration to observe and analyse the two alternatives mentioned above.

Mr. Sawant who is 30 years old is looking to allocate his surplus of Rs. 100000 p.a. towards a life insurance plan and some investments through mutual funds. His advisor recommends two options to him. One would be to invest in a ULIP scheme for a term of 10 years with a premium of Rs. 100000 p.a through which he was able to insure a sum of Rs. 1000000 [10 times of Annualized Premium (10 x Rs. 100,000)].

The other option was to invest Rs. 4400 in a Term Insurance Plan of a reputed insurance agency which provided a similar cover of Rs. 10 lakhs for a period 10 years and investing the remaining amount into mutual funds.

Upon thoroughly analysing both, Mr. Sawant was able to draw the following conclusions:

The cover received under the term plan was for significantly longer period which serves the purpose.

The returns made by Mr. Sawant while investing the residual sums in mutual funds were also higher than the ones that were made through ULIPs. The illustration depicting the same is shown below.

 

* Additionally fund management and policy administration charges applicable and GST @18% thereon. 

 We can see from the above that the combination of Mutual Fund investments and a term plan is a better alternative than choosing a ULIP option. A smart investor will make the most of both opportunities and ensure that he makes high returns from his investments and insure himself at the same time.

*For the purpose of calculations, actual performances of several equity mutual funds were considered for the period 01/01/2008 – 28/11/2017.

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