One of my friends has 14 insurance policies with a total life cover of Rs.29 Lakhs and pays a huge insurance premium of Rs.3,75,000/- annually.
However, his housing loan outstanding amount is Rs.67.50 lakhs, having two kids who are studying in upper primary and his wife is homemaker.
He was under an impression that he has enough insurance as he is paying such a large premium. Until I woke him up with a question, “Are you adequately insured?”
Then I showed him his responsibilities towards his family and his economic value to the family. It was atleast 3 times more that what insurance cover he already had!
That’s a mistake that a lot of Indians have been doing. They put their money in insurance plans and they say that they have invested their money.
However more and more people are realizing the difference between insurance and investments.These are two different financial products with different objectives altogether. Combining both insurance and investment together is like traveling in two boats at the same time.
Let’s explore the problems it generates:
Problem no.1: Inadequate Insurance
As we see in the example of my friend, he is not adequately insured. If he has to factor in his responsibilities towards his spouse and children, my friend needs a cover of atleast 3 times of his existing cover of Rs 29 lakh.
Problem no.2: Inadequate returns
Historical returns in life insurance products are less than what you get from Banks and other debt products. If you compare with long term equity returns, the returns in life insurance would be roughly half of what you get from equity.
Problem no.3: Low liquidity
In life insurance products, your money is locked in for the initial 3 years to discourage surrendering the life cover. In any case, taking money out during the term of the plan is not easy.
What about you? Have you found any advantages of mixing insurance and investments? Please share.