Never mix it up -Investment with Life Insurance

Posted in Finance & Investments, Investment, Life Insurance - 23 June 2010 - 2 comments

Why we should not use life insurance plan as an investment plan? Life insurance plans are often used as an investment or retirement plan. Attractive advertisement of life insurance company “Kahi Aap rah to nahi gaye” or convincing sales approach of agents of life insurance can make you invest in low earning return investment.

Life insurance can be classified in three category :

1. Whole life insurance – These are the traditional insurance plans which comes with the retirement and investment planning. Whole life insurance plans are also known as permanent or value added insurance plans that covers your life insurance, investment and save income tax under section 80c in India. The premium you pay on this insurance is charged higher than term plan insurance and rest of premium is set for investment by insurance manager. Insurance agent always attempt to sell these plans as they get handsome commission.

2. Term plan -Term insurance policy is like your car insurance policy. Every year you pay, but if you stop paying, the policy lapses and nobody owes anybody anything. That’s renewable every year and premium may rise but you won’t be dropped. if you don’t want to get life insurance cover at your 60s and 70s, when it starts to get expensive by that age most have retirement savings and children are not dependant, they are grown and independent.

3. Free insurance (mostly comes with your investment plan) – This days, with SIP (Systematic Investment Plant) you can have life insurance for free up to certain amount. And nothing is wrong to get free life insurance as far as they don’t have any charges on that.

The main argument is about, whether life insurance is a good investment or it would be better to buy an inexpensive Term Plan and invest the additional amount that the whole life insurance would have cost. But before you buy a whole life insurance, you must calculate the comparative difference in your spread-sheet with the term plan plus investing money at bank interest. You should also take into consideration the income tax benefit with whole life insurance and still the term plan with separate investment would come more beneficial. In making that decision, there are several issues that should be considered :

1. You have to pay premium regularly with whole life insurance and if you fail insurance company can charges you penalty on your non-payment and the policy can be revoked. Whereas in case of term plan you can just be continued with the little payment of premium and your previous investment will not be affected.

2. After paying little amount on Term plan, your addition investment can be diverted to better earning investments like company deposit, mutual funds or shares.

3. Mostly whole life policy is 20-30 years long and income you earn on your premium after deducting mortality, commission is very low, since India have inflation of 8-10% your cash value after 20 year will not rise at all.

Only if you are typical business men and not making any saving, the whole life policy will make force you to make investment and if you already have whole life policy, it is not advisable to discontinue with it. But if you can manage your term plan and invest regularly and you compare the investment return with term plan and whole life policy, you will not prefer to go for whole life insurance.