Investment or Insurance

A few years ago when I had just started my career, a financial adviser approached me to help me invest Rs 1 lakh  (or rather Rs 0.1 million that sounds better, isn’t it) to save the taxes. At that time I hardly knew anything about investments, savings or insurance. So I followed him like an obedient school boy. He sold me a ULIP, a few LIC policies and a mutual fund. Obviously not all at the same time but within a gap of few months. I felt relieved, to think that I am sufficiently insured and have invested wisely in good policies.

I kept on paying my premiums for the next couple of years. One day, on advise of my friend I decided to check the value of my invested money. That was the first time, I explored the details of my ‘wise’ investments and the realisation was startling. I came to know that my investments were not that wise as they seemed to be. What I found was that I had neither put my money in a category which could be called investment nor it could be called an insurance. I had simply put my money in hybrid policies which were supposedly offering me both investment and insurance, but neither was fulfilling the purpose it should have been.

My ULIP which was sold to me by showing a hypothetical proposal of 7-10% return along with an insurance was actually not giving any return to me. Apart the insured amount was not sufficient to serve any purpose in case of any contingency. For instance, I was paying a premium of Rs 20k annually as ULIP premium. In 3 years I had paid Rs 60k as premium. As per the hypothetical tables, my money should have been increased by 7-10%. So my portfolio should have had something around 65k, but in reality it was showing to be less than 60k. On enquiry I found that most of the money paid as premium had been deducted to cover my insurance and other charges. So though I was paying Rs 20k as premium, in reality only 60% of that was being invested. Similarly the sum insured was 5 times the premium, which comes to be Rs 1 lakh, which again was not sufficient to be of any help in times of contingency.

Similarly my other LIC policies were also linked to equity market and had been showing lot of volatility in terms of returns. So they were also neither investment nor a proper insurance. The only good thing which I had done was an investment in mutual fund. This was a pure investment. Though this money was also invested in equity market, like the other policies, but it was not a hybrid. It was pure investment with no insurance coverage.

Over here, I am not criticising the equity linked LIC policies, or the ULIP. They have their own merits/demerits and depending upon individuals requirement he/she may invest in it. My suggestion is only for those friends who are starting their career and are not sure what and where to invest. I would suggest you should analyse your requirements and decide whether you need investment or insurance. If you need investment then go for policies which talk only about increasing your money, don’t try to get insured while thinking of growing your money. Simply put, if you need to be insured, then go for a conventional plan which only insures you. Do remember that the purpose of insurance is long term coverage against any mishaps. So insurance should always be long term, with low premiums and high amount as sum insured. Investments could be short or long term, safe or risky investments, depending upon individual’s appetite. I am not talking about various options available under both investment and insurance. I will write about them in my forthcoming articles. Keep an eye over this page for further articles and of course do write what you like or dislike about this article…..