In the long journey of creation of wealth for achieving the long-term goals of say, acquiring a house, education/ marriage of children, adequate retirement fund etc., an investor could come across several hurdles. The biggest of these hurdles is the premature death of the main breadwinner. Loss of income, partially or wholly, is generally the consequence of the pre-mature death of the only earning member of a family. The curtailment in the income of the family severely affects the fulfillment of long-term financial goals of the family. The family may even have to live a life of deprivation and poverty. Besides, the long periods of sickness or disability of the main breadwinner may also affect the financial position of a family. And, this is where life insurance gets its relevance.
The business of insurance is concerned with providing protection to the economic value of various assets. Strictly speaking, human life is also an asset, not only to its owner but also to all those who are related to and dependent upon him for their living. Life insurance is designed to protect the insured and his dependents against various risks associated with human life such as risk of untimely death, long periods of illness due to critical diseases, loss of earnings due to disability etc.
Life Insurance As An Investment: Many persons look at life insurance as an investment. They buy policies sold to them by eager insurance agents who promise a decent return thereon. However, please note that life insurance is not an investment product. Although many insurance policies are designed to provide some sort of returns in the form of a participating bonus, life insurance should never be viewed as investment. Most or assurance policies with profits (bonus) provide an average long-term return of just 3% to 5.5% p.a. only. This is, quite obviously, not a good return as compared to other avenues of investment. Hence, life insurance should be viewed only as a protection product. Buying life insurance is just like carrying an umbrella on a sunny day to protect yourself against
the possibility of untimely rain i.e. as a protection against the risks of death or disability.
Remember, life insurance does not prevent a person against the actual happening of an untoward event such as untimely death or disability. It only protects a person or his dependents from the economic consequences of such happenings. Life insurance gives just a peace of mind to a person from worrying about such events as may cause economic suffering either to himself or to his family members in case of certain unfortunate happenings.
Hence, while buying life insurance, you must think that you are buying only peace of mind, not making an investment. The cardinal rule to remember while buying life insurance is to think that the real benefit is the insurance cover only. Hence, try to buy a policy with just pure simple life-cover, without any associated savings component. Give the so called “saving component” a miss. Invest the premium so saved in some other lucrative investments like mutual funds to get a better return thereon. Since life insurance should not be viewed as an investment, the return on a policy is really of no consequence. Investors should view life insurance as a protection product only and conduct their investment activity in other relevant financial products.
People are often lured by the endowment plans sold by insurers which provide a return. The rate of return on such policies is, however, seldom better than the savings bank rate (compounded) offered by banks. As an investment, therefore, insurance policies do not provide protection even against a moderate inflation rate. Hence, life insurance, should always be bought with its correct objectives viz. buying insurance cover for:
- Provide protection to self and family in case of premature death, disability or critical diseases.
- Building up a fund for education/ marriage of children.,
- As a retirement product to provide pension for old age.
The first objective can be met best by obtaining a term insurance cover for a desired amount. The second objective can be met by buying the Children Education or Marriage Plans which provide an inbuilt premium waiver benefit to ensure that the survivors do not have to pay premium after one’s death but will assuredly get the targeted corpus when the originally planned time for education or marriage comes. The third objective is met best by investing in ULIPs for a long term on a regular basis for a minimum of 10 years or until retirement, and then drawing pension by converting these funds into annuities. The pros and cons of these plans shall be discussed at length while discussing the various types of life insurance plans.