Why Insurance Is Not a Great Investment: A Financial Perspective
In the realm of financial planning, insurance is frequently marketed as an investment vehicle, often under the guise of providing "guaranteed returns" or "dual benefits" of protection and savings. However, this conflation of insurance and investment can lead to suboptimal financial outcomes. Products like LIC Jeevan Umang, LIC New Jeevan Anand, LIC Jeevan Labh, LIC New Jeevan Shanti, and LIC Jeevan Utsav promise returns, but the actual numbers often reveal their limitations as investment vehicles.
The 6% Yield vs. 12% Potential Returns
Insurance-cum-investment products generally offer an average annual yield of about 5-6% over the long term. In contrast, equity mutual funds, when aligned with a long-term investment strategy, have historically delivered returns of 10-12% or even higher, depending on market conditions and the duration of investment. The difference between these returns is significant over time due to the power of compounding.
Let’s illustrate this with a comparison:
• Insurance Product (6% return): If you invest ₹10,000 monthly in a typical endowment or whole life insurance plan for 20 years, your corpus at maturity would grow to approximately ₹52.5 lakhs.
• Equity Mutual Fund (12% return): The same ₹10,000 monthly investment in an equity mutual fund, assuming a 12% annual return, would grow to around ₹98 lakhs in 20 years.
This stark difference of ₹45.5 lakhs underscores why insurance should not be the primary investment vehicle for wealth creation.
Common Pitfalls of Insurance-Based Investments
1. Low Returns with High Costs: Insurance policies like LIC Jeevan Umang or Jeevan Labh allocate a significant portion of the premium toward mortality charges, administrative fees, and commissions. This leaves a smaller portion of the premium for investment, which contributes to the lower returns.
2. Lack of Liquidity: Insurance products often come with long lock-in periods. If you need funds before maturity, you either forfeit a portion of your investment or receive a surrender value, which is far less than the premiums paid.
3. Inflexible Structures: Most traditional insurance policies do not allow flexibility in investment strategies. You cannot adjust your contributions, asset allocation, or withdrawal plans based on changing financial goals or market conditions.
4. Misselling Practices: A prevalent issue in the financial industry is the misrepresentation of insurance products as investments. Agents often highlight "guaranteed returns" without disclosing that these guarantees typically result in low yields.
The Alternative: Goal-Based Investing
Goal-based investing, such as what FinEdge advocates, ensures that investments are aligned with specific financial objectives like retirement, education, or wealth accumulation. Equity mutual funds, when chosen with expert guidance, provide a disciplined and flexible approach to investing, offering potential for higher returns over the long term.
• Customization and Personalization: Unlike rigid insurance products, mutual funds can be tailored to your risk appetite and financial goals.
• Liquidity and Accessibility: Equity mutual funds provide greater liquidity, allowing you to redeem your investments when needed.
• Tax Efficiency: Long-term investments in equity funds benefit from more favorable tax treatment compared to the returns from traditional insurance products.
Learn more about Goal Based Investing
Key Takeaways
• Insurance is for Protection, Not Investment: The primary role of insurance is to provide financial security in the event of an unforeseen incident. A term insurance plan offers high coverage at a fraction of the cost of an investment-linked insurance product.
• Invest with Purpose: To build long-term wealth, channel your savings into instruments like mutual funds that align with your financial goals and provide the potential for inflation-beating returns.
• Seek Expert Guidance: Investment platforms like FinEdge’s Dreams into Action (DiA) enable collaborative and purpose-driven investing. By combining technology and expert advice, such platforms ensure that your investments are optimized for your specific needs.
By separating your insurance and investment strategies, you can ensure financial protection for your loved ones while building a robust corpus for your future. Avoid the allure of bundled products, and focus on solutions that maximize your financial potential. Remember, while insurance guarantees a safety net, investments pave the way to financial independence.
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