When you ask any 80s/90s kid, what are their investments – most of us will start by saying “I have a LIC Policy of 5L”! Try this out, will you :)? Say this with me insurance is not an investment!
Let us look at the definitions of Insurance and Investment from wikipedia.
Insurance – Insurance is a means of protection from financial loss. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss.
Investment – Investment is the dedication of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
Do you see any overlap in the definitions? But the whole financial industry would like to mix both of them and sell it back to you in different names? Endowment plans, Moneyback plans, Children’s Savings plans, ULIPs are all flavour of similar things. There are two big reasons why the financial industry do it:
- Charges on your investments is nice money for them; For your understanding of the issue I have taken different charges on an ULIP from LIC website.
Premium allocation charge
Mortality charge
Policy administration charge
Then we have FMC/ Discontinuation charge/ Withdrawal charge/ Miscellaneous charge which are all reduced as units from your investment. With so many charges, I doubt if its even an investment! And some of these charges are so convoluted that it is not easy to understand the cost involved. (if at all they mention while selling the product).
2. Agents make money – Agents generate commission from the charges by any insurance company when they sell a product to you. Meaning, they sell to you for their benefit.
So after all these charges, the “Insurance” has to beat or at least match inflation to be considered as an investment. Hence it is better to separate out insurance as risk management costs for your life and then separate out investments. This blog here will help you understand why it is better to separate insurance and investments with a numerical example.
