Investment and Insurance Products are Oxymoronic

While insurance is a necessity add-on to ones investment portfolio, many of us are forced to “invest” in insurance products, which we really dont need. That said, if you purchase life insurance for investment, both purposes are not adequately fulfilled.

The purpose of purchasing insurance is to secure dependents financially. For the younger people, buying insurance could be a tax saving instrument. However, this is not the right approach, as life insurance should not be bought until you have financial dependents. Likewise, the sole purpose of life insurance should not be tax saving. Tax benefits are considered incidental, which may accrue to you when you buy life insurance. Protection of dependants remains the key in life insurance. There are many other instruments out in the market that are more tax efficient and fetch better returns compared to insurance products. The key concern remains that many of them are not able to assess the quantum of their life insurance needs. I believe one needs at least life insurance equals 12-15 times of his or her income. 

There are life insurance products that offer guaranteed returns returns, which entice you to buy it. However, these " guaranteed returns" are less than what you receive from government debt instruments like securities. In addition, the returns generated depend on the cycle of interest rates in the economy, given the majority of insurance products invested in debt products. Moreover, the performance guarantee you receive is guaranteed in absolute terms or as a percentage of the amount and does not provide you with the CAGR (Compounded Annual Growth Rate) that is recorded over time. Having said that, in the absence of CAGR, you can not tell whether returns are comparable to the returns of other pure investment products. A financial consultant who sells a money - back policy gives the logic that a regular flow of money received after a certain period of time is a regular income, but sometimes he or she forgets to take into account inflation or other impediments. Annuity plan is also another category that guarantees returns and is not risky in itself. They are simply the reverse of insurance policies, where you pay a lumps to the insurance firm in the initial stage and it the firm agrees to pay you a fixed sum of money either for a fixed period or until perpetuity. These products often yield about 6% lower returns than other investment products and sometimes fail to consider inflation.

Note: These are just the opinions of the author and for knowledge purpose. The post is not inclined to affect your investment decisions.