Insurance is not an Investment

I am pretty sure whoever bought life insurance would have heard of the behemoth that rhymes with Knife Insurance Corporation of India, particularly how their insurance is suitable for saving taxes and gives you a return if you survive the tenure a lot more benefits. This blog is about calling out that BS and saying you should not mix insurance with saving taxes, as an investment.

Investment Perspective

Let’s first talk about what investment is. Investment is not about giving insurance or guarantee, it is about how much returns you get from your money. We will discuss how much returns you should make when we get to Inflation and Taxes—taking an example of the below policy details.

Name            : Doesn't matter
Sum Assured     : 1800000 (18 Lakhs) 
QLY Premium     : 12250 
Duration        : 14 years 
Coverage        : 120% of the sum assured - Let's approximate to 22 Lakhs 

Source: My own personal mistake (investment)

Explanation of the terms

• QLY → Quarterly Premium

• Sum Assured → Money you will get if you survive the duration

• Duration → Duration of the policy

• Coverage → The actual coverage which the dependants of the policyholder will be getting after the death of the policyholder.

For folks who are new to Insurance, this might seem like - “Wow, I am getting back the money that I have put in Insurance”. But not so fast, let’s do some math now by breaking up our insurance amount into two sections i.e a premium for term insurance and the rest we are going to put in equity (Index funds).

Term Insurance

Let’s consider one of the most famous private life insurance companies - HDFC Life (Not an endorsement).

Monthly Premium    : 225
Coverage           : 25 Lakhs 
Duration (Flexible): 14 Years

Not only the coverage is higher, but also the premium is way lesser.

Investment

Investing the remaining amount i.e 46300 into an index and expecting a 13% return (Lesser than NIFTY 50 historical returns) will lead to -

Source: https://groww.in/calculators/sip-calculator

Not only do you get higher coverage, but also get your complete money back. Yes, equity is risky but in long term, the risk of not owning equity is higher than owning it (More on that in a separate blog).

Coverage Perspective

If you look at the thumb rule of how much you should buy life insurance (Detailed article coming up) then you would know that 25 lakhs (let alone 18 lakhs) is significantly lesser. Your dependants won’t be able to survive on this with this amount no matter how less their expenses are because of inflation. We are not going to go very deep on how much you should take the insurance amount for but the general thumb rule is at least 10x of your annual CTC. This amount is significantly harder to achieve with Insurance products marked as investments. You need to shell out a much higher premium to get the coverage and the returns get worse because in the second approach, the equity compounds with more money and time. For example, if we want to have 1 crore coverage (6 times from our 18 Lakhs plan) then our yearly premium would be around 3 Lakhs in the insurance as an investment product (49000 * 6).

Conclusion

Stay away from -

• Bankers who sell investment products

• Relatives who sell investment products

• Friends who sell investment products

Due diligence is necessary.

Do note that the numbers given might not be accurate to the dot but the point that I am trying to drive home is that insurance is not an investment both from a returns perspective and also from a coverage perspective (inadequate insurance is as good as having none).

Fun fact, do you know that these state-owned insurance companies themselves invest in equities?