Tuesday, March 3, 2020

Do not mix Insurance with Investments

We are into the month of March – the last month of the current financial year. Tax planning is now uppermost on the mind of those who feel this is their last chance to save some income tax for the year. This urge to save taxes makes them highly gullible to the pointed sales pitch of ever available and savvy insurance agents who are on the prowl to ratchet up sales of their insurance products (endowment plans, savings plan, ULIPS, etc) in the guise of saving taxes for their clients. The lure is that most such insurance products are bundled as investments and promise to give back some multiple of the total premiums paid. Investors see a double benefit – tax savings plus money back at the end of the term. Consequently they are already sold and so quick to sign up for these products that their checks are already signed – they are just waiting to fill in the premium amount. This is how the vast majority of Indians are enticed into subscribing to sub-par investment products with hefty annual premiums for the meager purpose of saving a little tax. What they fail to realize is that by buying such products they neither get adequate insurance cover for themselves neither do they secure their future by way of making good investments. Lack of adequate regulatory prohibitions from bundling insurance products only makes it worse – ensuring this saga continues year after year.

The fact of the matter is this – Insurance does not equal Investments.

Let this message sink into your conscience through the above picture. Think of Insurance as an umbrella that protects you from unforeseen and sudden events. And think of Investments as an inverted umbrella that helps you accumulate and multiply your savings for a comfortable future. Do not ever mix the two – no matter how much the Insurance agent tries to convince you.

Insurance is a protection product and term cover is the purest and cheapest form of Insurance cover there is. That is the only form of Insurance you should consider buying – ideally for a sum assured of up to 10 times your annual income – to protect your dependents in the unforeseen event of any eventuality to your life. There is a cost that you have to pay for availing this protection - the annual premium. Think of this premium as an expense to protect your dependents if something were to happen to you. Do not be tempted by clever sales pitches that promise to recover this expense at the end of the term plus guaranteed additions plus reversionary bonus plus terminal bonus plus god knows what else. These sales pitches and the associated products are designed exactly to target your weak spot – your lack of willingness to treat Insurance premiums as an expense and your greed to recover this money at the end of the term. By succumbing to this greed you will end up owning products that neither gives adequate life coverage nor optimal investment returns. What makes it worse is that these are multi-year commitments which are often difficult to exit without talking a significant loss.

So the next time you are pressured by an insurance agent into buying such a product and are in doubt, ask for more time and then contact your financial advisor for a second opinion. Understand for yourself the tradeoffs between buying a bundled product versus buying a plain term plan and investing the rest of the money. Read The 4 ps of personal financial planning to understand how to go about planning your life’s finances in your own best interest.

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