When we hear the word “insurance”, our minds often jump to health insurance or life insurance or vehicle insurance. These forms of insurance are incredibly important for protecting ourselves and our families against life’s uncertainties. However, the world of insurance is much broader, and it’s important to understand it fully to make the best financial decisions.
First let’s talk about how many different types of insurance we can have and then we will see is insurance can be an investment choice or not.
Life Insurance
This type of insurance provides a financial benefit to the beneficiary upon the death or critical illness of the policyholder. Here are some common types of life insurance in India
Term Life Insurance: Provides coverage for a specific period (term) at a relatively lower premium. This does not give anything back if you do not die or get any critical illness in the tenure of the cover.
Endowment Plans: Combines life insurance coverage with a maturity benefit paid out at the end of the policy term.
Whole Life Insurance: Provides lifelong coverage and accumulates a cash value over time.
Unit Linked Insurance Plans (ULIPs): Combines life insurance coverage with investment in market-linked funds. This is very low risk investment and also it gives you insurance for your life, so this has been a good option for many.
Child Plans: Provide financial security for a child’s future needs like education or marriage.
Pension Plans: Help build a retirement corpus. This is completely getting money back at the time or retirement. In this usually you pay for some years and then you will start getting money around your retirement age. I also have one. I will share in future if this was right choice or not.
General Insurance (Non-Life Insurance)
This type of insurance provides financial coverage against various risks that may cause loss or damage to property, assets, or health. Some common types of general insurance in India include:
Health Insurance: Covers hospitalization expenses, medical bills, and other healthcare costs. Everyone must have this insurance as health expenses are growing at 15% CAGR.
Motor Insurance (Car Insurance, Bike Insurance): Provides coverage against financial losses arising from accidents, theft, or damage to your vehicle. Here also government has made some part of the insurance mandatory.
Home Insurance: Protects your home against fire, natural disasters, theft, and other perils.
Travel Insurance: Covers medical emergencies, trip cancellations, and other unforeseen events during travel. This insurance you can generally buy at the time of booking.
Fire Insurance: Provides financial compensation for loss or damage to property due to fire.
As we have seen there are many types of insurance but how many of them you must buy and what kind of insurance you can avoid and in which cases.
In terms of life insurance, you must need term life insurance which generally secures your net worth and if you do not have big net worth then you can have big benefit to your dependents if anything happens to you.
Other insurances which include money back plans into life cover they generally do not give big cover and also returns are very low. Returns are generally below FD rates or inflation rates. So, there is no sense of investing in those insurances. For very specific and rare scenarios, you may buy combined insurances.
Ex. Pension Plans – Which secures your pension. People who do not want to take any risk and they want to build their retirement savings. I also did the same thing. But with very little premium so I do not sacrifice other scenarios for future time.
In terms of general insurances, you must buy almost all types of insurance which generally secures assets or money in different ways.
Now let’s talk about insurance is good option as investment or not.
Insurance as Investment: Not Always a Win
Some insurance policies are marketed as both protection and investment. These policies, commonly known as endowment plans, money-back plans, or ULIPs (Unit Linked Insurance Plans), combine a life insurance component with an investment component.
The idea is to provide your family with financial security in case something happens to you, while simultaneously growing your wealth.
However, there are a few key issues with these insurance-plus-investment plans:
High costs: These plans often come with heavy fees, including management charges, premium allocation charges, and more. These charges eat into your returns, significantly reducing the amount that actually gets invested.
For example, Money back life insurance. With name of pension scheme many insurance companies are providing insurance products. As I said I also fall into that category. Luckily, I started in early in my age, so I had to start with small amount.
Low returns: The investment portion of the premium often goes into conservative investments, yielding lower returns than what you could potentially earn through other investment instruments.
Lack of transparency: The mix of insurance and investment can be complex. It’s sometimes difficult to understand how much of your money goes into insurance and how much gets invested, which makes it harder to evaluate the policy’s true value.
Let’s understand what my insurance is – I am paying premium of 2610 per month. I am getting 10 lack of life insurance in it for lifetime and after 25 years of the plan I will get sum lumpsum amount and I can also convert that into monthly pension. That final amount will worth almost nothing I can say. At starting of investment time, you will feel that money very big but as time goes and inflation reduces the value of money, those money will look like penny. I won’t be able to buy even a small apartment anywhere with that money.
Smarter Ways to Invest Your Money
If your goal is wealth creation, separating your insurance from your investments is often more effective. Here’s why:
Higher potential returns: Dedicated investment vehicles like mutual funds, stocks, or ETFs offer a wider range of options, allowing you to tailor your investments based on your financial objectives and risk tolerance.
Lower fees: Mutual funds and ETFs generally have lower fees compared to the charges embedded in investment-linked insurance policies.
Flexibility: You have more control over your investments. You can make changes easily and choose where to allocate your money without being tied to an insurance plan.
The Bottom Line
Insurance plays a vital role in financial planning. But it’s essential to distinguish between insurance for protection and insurance as investment. Before purchasing any policy, carefully consider:
Your need: Are you primarily looking for protection or investment growth?
The cost: What are the fees and charges associated with the plan?
The returns: What are the realistic return expectations?
Conclusion
Remember, term life insurance provides essential financial protection for your loved ones, while well-chosen investment instruments can grow your wealth. By separating insurance and investments, you can make more well-informed choices and build a solid financial future.
Disclaimer: This article provides general information. Always consult with a financial advisor to discuss your individual needs and create a financial plan tailored to your specific situation.
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