Why insurance is not your investment

By Sandhya Kannan

Once upon a time, a Delhi couple in their 50s without two daughters were approached by an agent. He was friendly, courteous, and was a mutual friend. Plus, he seemed knowledgeable about money matters. So, the couple welcomed him home and entertained his conversations.

Pretty soon, he got right on to point. The husband, the bread-earner, was a few years away from retirement.

“Will your pension get you the same amount as your salary every month?” he asked them.

Naturally, the answer was no. Plus, they had a long list of dreams that would cost money. Topmost on their mind was their younger daughter’s higher education and subsequent wedding. (The elder was about to get married, and her expenses were budgeted already.) They also had a small loan to pay off.

“Keeping all this in mind, your savings don’t seem enough, sir!” the agent told them.

“You really need to invest.”

“But we don’t know much about investments. Plus, they seem too risky. We have a few bank deposits. We’ll use them when needed,” the Delhi couple explained.

But armed with enough data, financial calculators, and research, the agent explained to the couple that they are grossly underprepared for retirement.

Until now, the agent was on the right track. But since the couple was fairly risk-averse, the agent started suggesting a Money-back life insurance plan that offered both tax benefits, life insurance and earned them money. After 10 years, the couple would get Rs 2 lakh every year for 10 years. “We get twice the money back!” they thought.

And so, the couple signed up for insurance that charged a premium of Rs 1 lakh per year.

Do you know how much return this translates to? 6.79%! That’s lower than the 7% rates you are getting on some of your bank deposits. Plus, your money is locked in for 20 years.

In case of an emergency, the couple will not be able to dip into their savings.

So, what else could they have done?

Almost all of these are better than insurance. So, the couple could have opted for a simple term life insurance that is usually dirt cheap, and ‘invested’ the rest of the money in the above options.

Bottom line

Don’t invest blindly. What appears to be a high return may not be true.