This is a warning which needs to be shouted from rooftops. “Never mix insurance with saving”. “Never mix insurance with investment”. Sadly, few citizens pay heed to this warning until it’s too late. You can blame greed for this sad state of affairs. You pass a shop and see this offer “Buy two shirts for the price of one”. “Buy two bags and get the third one free”. You march into the shop and buy the bags and shirt. You never wanted a bag or a shirt, but you still made the purchase. This is a clever trick used by marketers to sell their products. Sadly you are a victim of all these cunning marketing gimmicks. Life insurance agents are the masters of marketing gimmicks. They lure you to avail endowment life insurance plans, which mix insurance with saving. Then the secret weapon of life insurance agents…. The ULIP. This is a life insurance plan which mixes insurance with investment. Want to learn more on life insurance? Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice / education to ensure that you are not mis-guided while buying any kind of financial products.
Before moving to this topic, just answer this simple question. Why do you avail life insurance? Simple….to provide for your loved ones in your absence, in case of your untimely demise. Life insurance is plain simple protection from risk. The greatest life insurance product to do the job….The Term life insurance plan. Surprisingly your life insurance agent has never mentioned this plan. He wants you to avail an endowment life insurance plan. This story will tell you, why your life insurance agent is trying to sell you an endowment life insurance plan.
Uttam who is 30 years old, works in a garment factory. He lives with his wife Hema, who is 28 years old and son Sanjay who is 3 years old. Uttam knows the importance of life insurance and wants a suitable life insurance plan to provide for his family, in case of his untimely devise. Uttam wants to avail a term life insurance plan and contacts Suresh, a life insurance agent. Suresh meets Uttam and tells him “A term life insurance plan gives you nothing if you survive the term of the plan. It’s just a waste of money. You will lose the premium you pay. Why don’t you avail an endowment life insurance plan? Not only are you protected with life insurance, you also get a maturity amount and bonuses under this endowment life insurance plan”.
Uttam follows Suresh’s advice and avails an endowment life insurance plan. He has to pay an annual premium of INR 20,000 for a sum assured of INR 5 Lakhs. The term of the plan is 20 years. What Suresh does not tell Uttam is that he gets 35% of the premium paid by Uttam, as an upfront commission for the first year of the plan. Suresh is then able to pocket, 7.5% of the premium paid in the second and third year of the endowment life insurance plan in trail commissions. There’s worse news to come….Uttam will get a rate of return of only about 6% on his investment in the endowment life insurance plan, in spite of staying in the plan till maturity and collecting all bonuses under the plan. The endowment life insurance plan offers a sum assured of INR 5 Lakhs. Hardly anything to provide for a family in these tough times.
What do you learn from Uttam’s mistake? Uttam should have availed a term life insurance plan. He would have to pay an annual premium in the range of INR 5000 to INR 7000, for a sum assured of around INR 50 Lakhs. This money would have been sufficient to provide for his family in case of his untimely demise. Instead of paying a premium of INR 20,000 a year for the endowment life insurance plan, Uttam could have availed a term life insurance plan with an annual premium of around INR 5,000, with a term period of 20 years and invested the difference in the public provident fund (PPF) or a good equity diversified mutual fund, depending on his ability to bear risk. He could have got a much higher return, than just the 6-7% returns he got under the endowment plan.
Why do you buy a mobile phone? It has to be to talk to your friends and family. Today’s smart phones can do pretty much everything and are like a computer. But of what use is a smart phone, if the phone keeps hanging while talking? In very much the same way, the purpose of life insurance is protecting your family from risk. If you are looking for return on investment, there are several financial instruments to choose from. Let’s understand why you must not mix insurance with investment, through a simple story.
Suraj who is 35 years, works in an IT Firm. He is married and has two sons. Suraj wants to provide for his family in case he meets with an untimely end. Suraj contacts a life insurance agent Narendra, who advises him, “Avail a unit linked insurance plan (ULIP). You get the benefit of both insurance and investment”. Trusting Narendra, Suraj paid a premium of INR 50,000, in what was a regular premium equity ULIP, with a term period of 20 years. The sum assured of the ULIP is INR 50 Lakhs.
What Narendra did not tell Suraj was that the ULIP has fairly high charges, in the initial years of the plan. Also most of the money left of the premiums, after deducting the charges, is invested in the stock market. Hardly any money is left to provide a decent life insurance cover. Suraj was frustrated with the ULIP and wanted to surrender it. Unfortunately for him ULIPs have a compulsory lock in period of 5 years. So why did Narendra sell Suraj a ULIP? Simple…Narendra got a good commission after selling Suraj the ULIP.
What do you learn from Suraj’s mistake? Suraj should have availed a term life insurance plan. He would have to pay a premium of around INR 5,000 for a sum assured of INR 50 Lakh, for a term period of 20 years. Sure, Suraj would have got nothing if he survived the term of the plan. But life insurance is availed to protect loved ones and care for them in your absence. Suraj should have availed a term life insurance plan with a sum assured of INR 50 Lakhs, paying a premium of just INR 5000. He could have invested the remaining INR 45,000 in an equity diversified mutual fund or PPF, depending on his risk profile. Instead Suraj invested in a ULIP paying INR 50,000 a year in premium. The rate of return from the ULIP was a mere 7%. Suraj would have got a higher return, if he separated insurance from investment.
Mr C.S.Sudheer is a management graduate. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.
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