In today's uncertain world, we are never sure about our future. While we are busy earning, be it to make a livelihood or to get the newly launched luxary car, we cannot guarantee we will be able to accomplish what we desire. We make investments to save money for occassions, or to help us get some relief in emergencies. We buy health insurance policies so that we make sure in sudden emergency situations if we need to be hospatilized, we are covered for the risk. We buy life insurance policies, so in case of an unfortunate incident of our death, our family does not come into a financial burden along with the already present grief of the death of a close one.
It looks quite obvious that this is indeed something that needs to be planned and done, rather than doing it in a haphazard way. However, do we really plan this activity? Have we managed our time, money and resources to the best optimum possible, so that you really have made use of the benefits that you have. And most importantly, have you just made a soup of everything and have no plan at all?
In this section, we are going to only look into one aspect in detail - mixing your Insurance with your Investments, and why you should be not doing this.
Answer the following questions:
- Do you have an Insurance Policy?
- Do you have a Term Insurance Policy?
If you have answered Yes to the first and No to the second question, chances are you have already mixed Insurance with Investments. I will explain in detail in a different post what you can do now that you have already done this.
Below are the problems that you will come across once you mix your Insurance with Investments.
This is the biggest problem of mixing insurance with investments. You have a single policy, and you pay a hefty premium for the same. A part of this premium goes into investment, a part of it goes into the actual Insurance premium.
However, you do not have the option to pay your actual Insurance premium. You are forced to pay the entire premium every year. If you miss a premium, you miss being insured. Depending on the policy, you might even end up lapsing your policy.
You need to choose your policy wisely. If you have just gone by the words of your agent, chances are you will start losing money if you do not pay your premiums. Many policies come with a 'bonus' element, but it is actually not a bonus. It is just you getting your amount back subject to you paying your premiums on time.
If you calculate, the bonus you get is not actually something over your investment. In fact, it will be way less than what it would be had you invested the same money separately. But now, you are losing it because you are not able to pay your premium. Ideally, in an Investment scenario, if you do not pay, your existing money should continue to grow.
When you buy a plan that combines insurance and investments, there are a lot of fees, charges and commissions involved that get deducted from your premium. Had you done them as a term plan, very less commissions and fees would be involved. A term plan can give you a cover of 1 Crore in an annual premium of Rs 10,000. However, combined plans will never give you that high insurance cover, but will still deduct a high amount of insurance premium before investing the amount. Visit the below post to see the sample calculations of how you benefit in terms of money and insurance cover by separating out the plans.
Why do you invest money?
Investment should be for a cause. You need to pay your son's school fees in the next 6 months. You need to buy a car in the next year. You need to plan for your daughter's marriage in the next 10 years. Whatever the reasons be.
Your investment type must always be linked to the purpose of investment. For example, your son's school fees must go into fixed deposits, or low risk schemes as this is something you cannot compromise. Your car investment may go into mid or high risk investments. Your daughter's marriage investment can go into long term stock market units. Moreover, the closer it approaches, you might want to shift the money into other places. Say for example, after 8 years, you might want to shift the money from stock market to fixed or low risk type of investments as you would need the money in 2 years.
All of this, is completely void when you mix investments with your insurance. Some plans do offer you the option to shift from low to high risk market funds, but that is all. It is not flexible. Moreover, you must have the money in case you suddenly need it. What if your daughter plans to marry at 21 instead of 24? Your money is not 'liquid' enough in ULIPs or Insurance plans.
There is nothing worse than missing your premium and losing your insurance cover for that reason.
What would you prefer? Paying a hefty amount for a lesser insurance cover, or a small amount for a bigger cover? Although the answer is obvious here, people often tend to lose this point, because the agents cleverly hide it from the conversation.
When you mix your insurance with investments, you do not have an option to only pay your insurance cover and skip your investment amount. You have to pay the whole amount, which is typically very high. Also, as explained in the other blog on the previously mentioned link, the investment also earns you lesser amount due to high charges being taken by the company.
So you better be wise to take your decision.
It is always obvious that you should almost never go for a combined insurance-investment plan. Just be aware that what you are being told by the agents is only a part of the story, and a lot more is hidden behind that is never even told to you.