... INSURANCE Blog

Why it makes sense to keep life insurance separate from investments?


It’s very common to find people quoting about their insurance policies, when asked about investments for future. This is because of a misunderstanding that leads most people to take wrong financial decisions.

Even though people use the terms Investment and Insurance interchangeably, in reality they are not similar. Insurance is a product that covers the risk of policyholder’s death by paying lumpsum benefits and helps financially secure the dependents. Investment on other hand is used for wealth creation and to provide for additional sources of income in future. So to put it very simply, investment is about growth whereas insurance is about financial security.

Unfortunately, there are many hybrid financial products that offer both insurance as well as investment benefits. Though it might look attractive to handle both aspects of personal finance using just one product, fact is that these products are mostly expensive and return on investment is also quite less, when compared with other pure investment plans.

People tend to avoid plain term insurance plans because they are not used to the concept of 'No benefit' in case of policyholder’s survival. But what they forget is that plain term plans are very cheap when compared to hybrid products and money saved on premiums can be invested in pure investment products.

LIC

People tend to avoid plain term insurance plans because they are not used to the concept of 'No benefit' in case of policyholder’s survival. But what they forget is that plain term plans are very cheap when compared to hybrid products and money saved on premiums can be invested in pure investment products.

Let’s take an example to better understand it.

As of today, you can buy a hybrid product (insurance+investment), which gives a cover of Rs 5 lacs for an annual premium of Rs 30,000. Compare this with a term plan of Rs 50 lacs that you can buy for just Rs 5000. So essentially, you are getting a 10 times bigger insurance cover for 1/6th the price. You might argue that you won’t get any money on survival in term plans. But you can always save the difference amount (Rs 30,000 – Rs 5000 = Rs 25,000) in pure investment products every year. That will take care of investment part.

This is a very simple reason why it makes sense to keep insurance separate from investments. But beware that insurance sellers will try very hard to push hybrid products as it offers higher commission. So make sure you understand why it’s beneficial to go for term plans.