There is a popular saying that do NOT mix investment with insurance. This is very apt when somebody is selecting insurance option. Whether to pick Term or Life Insurance.
First up, what is an insurance. Insurance is basically a type of financial return that gives a particular amount of money to the person's family or known ones (nominee) in case of a death of the person insured. This is useful when the person has dependents, housewife, small kids or have other financial duties to cater to which the person cannot do due to untimely death. It is recommended that every investor should have insurance policy (both health and life). Now, coming to life insurance, there are generally speaking 2 options. One Term Life Insurance where, the nominee gets the money only during the coverage period and nothing else if coverage period finishes.
On the other hand, Whole Life insurance policy is such that it not only gives the money during the coverage period (Just like Term Insurance) but also gives a fixed amount of money at the end of coverage period. This "extra" money at the expiry of coverage period is the return or maturity amount the investor gets for the premium he/she paid for.
Now, the Whole Life insurance premium is obviously more than the Term life insurance with all conditions the same. this extra premium is what the insurance company "invests" and gives the maturity amount back to Investor. However, if you compute the return of this, it comes to about 6-7% a year. This return is very similar or lower than the Fixed Deposit for such a large period of time (usually insurances are for 10-30 yrs). An investor is much better off to invest via Index investing given the time frame is lot more. Or investor can take that extra money and invest in FD by himself keeping the FD deposit flexible. Whole Life Insurance sometimes also offers a facility to take loan of it but most people dont use it and again it is complicating the insurance feature with other things.
The extra premium can be 3-4 times of the Term plan only premium. Though exact amount varies based on insurance company and return offered. But still 3-4x times is lot of money with very low return (6-7% typically)
So, all in all, it is better to buy Term Insurance policy rather than Whole Life Insurnace.
Annuities plans are similar. They promise to return a higher sum of money with long term option. But even that is not good return. The returns range from 5-7% for such a long term. Usually, Index investing, or FD is much better in these cases.
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