This is one of the biggest myths that people may think about insurance.
“Insurance is the biggest saving that you can make”
“Insurance will help you cover all the problems of your life”
“Buy this insurance plan and you will be a millionaire after this many years”
You will always hear the sentences from insurance agents or bank employees or ‘expert’ financial advisors who try to sell insurance or cross-sell insurance.
Let first understand the background of what is investment and protection.
Investment – in simple words is a corpus or a fund that you create by adding a smaller sum of money at every interval. The corpus or fund can be created for any purpose milestone in an individual's life.
It can be saving money for your child’s education or buying a new car or for a foreign holiday maybe for a house in the future. Another important aspect of an investment is the return or in technical terms rate of return (RoR) (simply at what rate will my investment multiplier over the time span)
Protection – when we say the word protection in the financial analogy it means a mitigation of risk in the future. This means I am assuring or accumulating money for an uncertain event that might occur.
So investment and protection are two distinct concepts.
Now let us by an illustration.
A financial advisor gives you three options to invest
Option 1 – invest 10,000 every month and get rupees 50 lacs at the end of 15 years.
Option 2 – invest 50000 every month and get 50 lacs at the end of 15 years also if you die bye-bye within 15 years you get 25 lacs on the date of death.
Option 3 – invest 5000 every month and get 50 lacs if you die within 15 years.
(Note; we are intentionally avoiding any maths in the above examples especially for the Reader who do not have a financial background)
If you compare all three options, Option 1 falls under the category of investment. Option 2 who is a combination of investment and protection and Option 3 provides only protection and no investment.
As a common man, we need both investments for income growth and protection against uncertainties. So it’s an established fact that we need both aspects.
Decision 1 – Opt for only option 1. Here we can invest and get handsome returns but we do not have the protection of life or health against any uncertainties.
Decision 2 – Opt for option 2. Yes, we have both investment and protection but yes we have to shell out more to achieve both the elements of investment and protection.
Decision 3 – Opt for option 3. We get only protection and have no investment for our future goals
Decision 4 – Opt for option 1 and option 3 together. Yes, we have both investment and protection at a cheaper rate compared to decision 2.
So which decision is the most optimal in the above illustration? Obviously Decision 4. Let each of the elements work on its own and not mix the two. We think that we have the best of both worlds in Decision 2, but the underlying is that we spend more in this process.
Endowment Life Insurance or ULIP provides what we have described above in Option 2. It provides you with moderate returns and life cover but they also charge a hefty premium.
Our intention was not to provide one-size-fits-all financial advice but to make you aware of the above concept also so this will help you to make more scientific and informed decisions about your finances. We are not against any type of specific insurance cover or recommend any flashy investment schemes.
It has been often in the newspapers that we read from many gullible people’s personal experience that insurance agents or financial advisors always cook you into buying policies that have a higher premium. The only reason to push you to buy such policies is higher Commission (Commission rates depend on the premium amount so higher the premium higher the commission).
We intend this article to only tickle your financial senses. This idea (mixing investment and protection) has been the basis of mis-selling financial products. Always be vigilant on when and where you invest your money. It’s your hard-earned money.