Do I need Insurance or Investments?
Is Insurance same as Investment?
I'm buying a money guarantee plan or a policy from LIC, will it suffice both my investment and insurance needs?
Confused with many such questions in mind??? Let's begin to find answers!
Always remember: Insurance is a liability while Investment is an asset. You buy Insurance to safeguard yourself from something unknown or unexpected mishap while you Invest with a clear thought or goal in mind, which could be a luxury holiday, marriage, retirement etc.
So, who needs insurance? Anybody who is earning and has someone partially or fully financially dependent on him/her needs an insurance.
And, who needs investment? Actually all of us! Yes, all of us must invest a part of our monthly income, if not for a specific goal, then for our future needs.
LIC gives me both insurance and satisfies investment needs, isn't it the best option to go? - A BIG NO!
Here we are trying to mix a liability and an asset. Let's understand this with an example:
LIC of sum insured of 10 lakhs for 20 years will have a premium of approx 50,000 rupees per year. It promises to give you 10L in case of death (so, covers insurance) and waive off any further premium, and in case of maturity (i.e. on successful completion of 20 yrs), it promises to pay you a little lesser than double of sum insured, so approx 18-19L. On calculation the return on investment (also called, ROI) comes out to be mere 5-6% (you can try this using any SIP calculator app on your mobile).
So, what should I do? Where to invest? What to buy for insurance ?
First for insurance, one should buy a term insurance plan, which has a simple philosophy, you die, they pay the insurance amount; you don't die, they get to keep the premium you paid. This is exactly similar to our car insurance.
But don't worry, the premium you pay here is mere peanuts.
For instance, buying a policy with sum insured of 50 lakhs running up till 65 yrs of age, a non-smoker 23 year old male needs to pay approx INR 3500 + 18% GST annually, amounting to only 4,130/- rupees per annum.
So even if there is no unfortunate event of death, one ends up paying less than 1.75 lakhs in 42 years, but in case of death, you leave your family a sum of 50 lakhs and further premium are not required to be paid as the policy just ends there.
So compare, LIC paying 10L (with you paying premium of 50k/year) and term insurance paying 50L (with you paying premium of 4130/year).
Hence, my advise: set aside this small amount for term insurance, and save the rest for some better investment options that would give you much higher returns than 5-6% seen in above LIC example.
Next, comes Investment, for this, there are multiple options, varying from Mutual Funds, PPF, FDs, RDs, Stocks etc. I will write a separate post for all such options with their respective pros and cons and approximate ROIs.
Please comment and let me know if this article helped you and if there are any specific questions that I can help you with.
Also, coming soon: Why do I need a separate health insurance policy when my employer already covers me and my family for a handsome amount?
By, Ravi Malik
Is Insurance same as Investment?
I'm buying a money guarantee plan or a policy from LIC, will it suffice both my investment and insurance needs?
Confused with many such questions in mind??? Let's begin to find answers!
Always remember: Insurance is a liability while Investment is an asset. You buy Insurance to safeguard yourself from something unknown or unexpected mishap while you Invest with a clear thought or goal in mind, which could be a luxury holiday, marriage, retirement etc.
So, who needs insurance? Anybody who is earning and has someone partially or fully financially dependent on him/her needs an insurance.
And, who needs investment? Actually all of us! Yes, all of us must invest a part of our monthly income, if not for a specific goal, then for our future needs.
LIC gives me both insurance and satisfies investment needs, isn't it the best option to go? - A BIG NO!
Here we are trying to mix a liability and an asset. Let's understand this with an example:
LIC of sum insured of 10 lakhs for 20 years will have a premium of approx 50,000 rupees per year. It promises to give you 10L in case of death (so, covers insurance) and waive off any further premium, and in case of maturity (i.e. on successful completion of 20 yrs), it promises to pay you a little lesser than double of sum insured, so approx 18-19L. On calculation the return on investment (also called, ROI) comes out to be mere 5-6% (you can try this using any SIP calculator app on your mobile).
So, what should I do? Where to invest? What to buy for insurance ?
First for insurance, one should buy a term insurance plan, which has a simple philosophy, you die, they pay the insurance amount; you don't die, they get to keep the premium you paid. This is exactly similar to our car insurance.
But don't worry, the premium you pay here is mere peanuts.
For instance, buying a policy with sum insured of 50 lakhs running up till 65 yrs of age, a non-smoker 23 year old male needs to pay approx INR 3500 + 18% GST annually, amounting to only 4,130/- rupees per annum.
So even if there is no unfortunate event of death, one ends up paying less than 1.75 lakhs in 42 years, but in case of death, you leave your family a sum of 50 lakhs and further premium are not required to be paid as the policy just ends there.
So compare, LIC paying 10L (with you paying premium of 50k/year) and term insurance paying 50L (with you paying premium of 4130/year).
Hence, my advise: set aside this small amount for term insurance, and save the rest for some better investment options that would give you much higher returns than 5-6% seen in above LIC example.
Next, comes Investment, for this, there are multiple options, varying from Mutual Funds, PPF, FDs, RDs, Stocks etc. I will write a separate post for all such options with their respective pros and cons and approximate ROIs.
Please comment and let me know if this article helped you and if there are any specific questions that I can help you with.
Also, coming soon: Why do I need a separate health insurance policy when my employer already covers me and my family for a handsome amount?
By, Ravi Malik
Nicely drafted ,clear,crunch, precise data driven with no beating about the bush.
ReplyDeleteThis is wonderful!
ReplyDeleteGood explanation.
ReplyDeleteGood topic to cover. I have personally always favored a term insurance plan over an ULIP or other money back/ premium back insurance plans. It is not just about which insurance is better, it is about what leads to more efficient or smart investment. There are many good investment options other than insurance linked once, which have been giving much better returns as compared to insurance linked ones.
ReplyDeleteGood topic to cover. I have personally always favored a term insurance plan over an ULIP or other money back/ premium back insurance plans. It is not just about which insurance is better, it is about what leads to more efficient or smart investment. There are many good investment options other than insurance linked once, which have been giving much better returns as compared to insurance linked ones.
ReplyDeleteBut in my opinion, the 5-6% of return is almost fixed in case of some traditional insurance plans.
ReplyDeleteOr the return May be more than 5-6%.
But in other plans they are market related nothing can be Guaranteed.
I would like you to clear these basic doubts or concerns regarding investment and insurance.
And also, in my view insurance can also be a better investment option. Would like to have your opinion on this,Ravi.
Hi friend,
DeleteSorry I can’t see your name as the profile shows Unknown. Nevertheless here’s the answer your point:
1) There is nothing as free in this world, so a insurance linked policy gives you this insurance at a cost. This cost is actually taken from the returns that your money (premium) would make.
2) There are many plans for investment that are NOT market linked. To name a few- Ppf, debt mutual funds, FDs, RDs etc.
3) As I mentioned in my post- we must understand that Insurance is a liability, it’s not an investment. Think!! :)
I’m planning to soon write an article on investment options as well, that should clear the air further.
Hope this helps!
Good going Ravi, very nice article on insurance vs investment. Keep it up.
ReplyDeleteVery nicely explained. Even an inexperienced investor could understand. Good initiative. Way to go
ReplyDeleteVery beautifully written and explained. This being a topic which is a delima to many, your blog helps them to make an easy and right choose. Need up the good work.
ReplyDeleteNicely written.Pleade keep on writing such articles to help salaried youngsters have clarification of better option to go for while they are thinking to make best utilization of their salaries.Keep inspiring
ReplyDeleteVery nicely explained and good points
ReplyDelete