Don’t Mix Life Insurance with Investment
Updated: Sep 6, 2020
One should not mix insurance with investment, as basic purpose of life insurance is to provide financial security to your family in case of your unfortunate death. This basic purpose of life insurance is lost when individuals end up buying an endowment , money back or unit linked insurance plans for investment and to save income tax. Insurance agents also push these products as they get better commission on such policies.
Let us check what are the effects of mixing insurance with investment.
1.They leave you under-insured.
Example: 30 year old Rahul has annual salary of Rupees 8,00,000 and yearly family expenses of Rs 4,00,000.Endowment plan with term of 20 years and sum assured of Rs 1 Lac will cost him approximately Rs 50,00,00.
A young individual like Rahul who is in his early phase of his job career, may not have large savings. Moreover he is likely to have liabilities like home loan, car loan and education loan
etc. In case of his untimely death ,10 Lac insured amount will not be enough to protect his family from his financial liabilities and to meet family expenses in future.
If Rahul had bought a term life insurance policy with sum assured of Rs 1 crore, then it would have cost him approximately Rs 18,00,00. Rs 1 crore will be enough to cover his liabilities and meet his family's future expenses.
2.Lower returns than other products
Returns from endowment and money back policies are in range of 5-7% depending on type of policy selected. It is very less as compared to other tax saving instruments like PF and tax saving mutual funds.
Returns from ULIPS are comparatively better, but you will have to stay invested for minimum 10-15 years.
3.Lower returns on premature withdrawal.
If any endowment , money back or unit linked insurance policy is surrendered in initial years, then surrender value might be lower than premiums paid depending on no of policy years completed. If policy is surrendered before completion of 5 years then deductions claimed in previous year's under section 80C of income tax act will be void, and all the claimed deductions will be added to your income in that financial year.
We suggest you first buy a term life insurance policy with sufficient cover. Premium paid for term life insurance also enjoys exemption under 80C of Income tax act.
Any surplus savings you can invest in other tax saving instruments like tax saving mutual funds (ELSS), Tax saving bank fixed deposit, NPS, PPF etc.