People often doubt if it is wise to mix insurance and investment. In a single word, the answer is No. You should never mix insurance and investment. Though I can give you a technical explanation with all the financial jargons, I will better keep that aside and will explain to you the concept of mixing insurance and investment with a simple story.
Is It Wise to Mix Insurance and Investment?
Suppose you are a person who wants to invest 1 Lakh every year and you approach a bank to invest that amount in a simple Fixed Deposit (FD). I hope everyone understand what a fixed deposit is. 😊
The Bank manager says that he would be very happy to have you as a customer and would invest the amount every year. But at the same time he puts forward some conditions. The conditions are as follows:
If you can invest this amount for 25 years continuously, only then, I will give you the returns of 5%. If under any circumstances, you approach me to break your investment before 25 years, I will deduct penalty from the basic investment amount and will return you the remaining money. The basic amount here refers to the amount of 1 Lakh which you are going to invest every year.
If you come to me in the 1st two years, I will pay you nothing. Nothing, to be precise, means Zero. Though, you have invested 2 Lakhs in first 2 years, I will pay you nothing if you come to withdraw in the first two years.
If you come in between 5th-10th years, I will give you around 50-70% of the money which you have paid me. There would be a penalty of 30%-50% on the amount you have invested.
If you come in between 15th–20th years, The chances are that you will get your entire amount back, which is, the amount you invested. There would not be any interest or returns on that money.
The only scenario in which I will give you 5% returns is that you stay invested for 25 years. And, there is a big ‘but’… which cannot be relied upon,
But, I cannot promise you that these 5% returns would be fixed. If my bank is not performing well and if there is a reduction in annual bonus declared by my bank, you will have to bear the loss. The returns can even go down to 4% or 3% too.
This is a classic example for the traditional insurance policies.
Also Read : Tax benefits under Section 80D
Would you invest 1 Lakh per year in this bank?
If your answer is yes, then you can continue to invest in all the traditional life insurance policies available in the market.
If your answer is No, which is precisely the reason, why you should never mix insurance with investments.
Though people collectively say NO to this, there are still a few of us who invest in traditional insurance policies.
The question here is, why do people invest in such policies? One of the reasons is that the returns are presented to the public in an entirely different way or rather, in a confusing way.
What if someone comes and tells you that if you invest 1 Lakh per annum for 10 years and after 12 years, they will pay you 1.80 Lakhs for the next 10 years. Does this sounds alright?
But, NO. It is not pretty good as the returns would only be 5%.
Now think about it. Is it wise to mix insurance with investment?
ULIPs – Why you should not invest?
First let me tell you that unlike traditional life insurance policies, ULIPs invest your money in stock markets.
Again, quoting the above-mentioned example- If the bank manager tells you that his bank is ready to invest your money in stock market but the gain or loss on that money would be yours. As you understand the basics of stock market, you agree to the mentioned loss and gain condition.
Second condition is that you will have to pay some charges to his bank to invest that money in market. Additionally, since his staff is servicing for you day and night, you will also have to pay some administration charges.
Third condition is that you will not be able to withdraw your money before the first 5 years. This 5 year is called lock-in period in Life Insurance ULIP policies where you can not withdraw your money.
Fourth, but not the last condition, you can stop paying the premium anytime but if you stopped paying premium within a duration of first 5 years, there would be a fixed penalty. This fixed penalty in ULIPs is called as surrender charges.
Now, after having an understanding of these areas the question is up to you. Will you invest? You can not withdraw your money for 5 years. Also, You pay additional charges for investing in stock market through ULIP.
Is it not better to invest through Mutual Funds?
But people still invest, and the main reason for this is the tax benefits. I seriously do not understand the tax benefit part of it. There are so many other instruments which you can choose to invest for tax benefits.
But if you have read this article, I’m sure that you have definitely understood– Never ever mix insurance with investment!
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