Do not mix Insurance and investment: What is the biggest mistake made while buying insurance coverage? The biggest mistake while buying an insurance plan is to look for its maturity value or return on investment. Actually, such thinking is the result of a big misunderstanding, which a large number of people have. It is a misconception to look at insurance policy as an investment. Insurance buyers consider maturity benefits and returns as extra benefits, while investors consider insurance as additional benefits. But the truth is that this mentality of mixing insurance and investment can cause huge financial losses in the long run.
Why is it wrong to consider insurance as investment?
First of all, it is important to understand that it is wrong to look at an insurance policy as an investment. This is because when you invest your money somewhere, you expect to get returns from there. Because of this expectation, people start looking for returns or maturity benefits in return for the premium paid to the insurance company. In this process, they reject term plans that provide more coverage at a lower cost and choose endowment plans in which they get some money as survival benefit if they survive. They feel that there is no point in buying a term plan because it does not provide any survival benefit. Investors who think like this do not remember that despite paying very high premiums in endowment policies, they have to make do with low coverage. Whereas pure term insurance policy gives them good coverage at a very low premium. In the opinion of experts, term insurance is the cheapest and best form of life insurance. Because the purpose of life insurance is not to get returns, but to achieve financial security.
Also read: SIP Pause: SIP will not stop even if there is a shortage of money, pause facility will help you in reaching your goal.
How to get full benefit from insurance and investment
If insurance and investment have to be kept separate, what would be the right way to take full advantage of both?After all, if you are ready to pay a high premium for an endowment plan, it would be better if you divide the same amount into two parts. Spend a portion on buying big insurance coverage through a term plan and invest the remaining amount in an equity mutual fund through SIP. In this way, you will get more coverage by spending the same amount and will also be able to get higher returns by adopting the right investment strategy. You will be able to understand this better with the help of this calculation:
Also read: Mutual Funds: 5 lakhs turned into 10 to 22 lakhs! These are the top schemes which have shown such wonders in 5 years
This calculation will surprise you!
If a 30 year old person wants to buy a term plan of Rs 1 crore which provides coverage till the age of 65 years, then his annual premium starts from just Rs 12 thousand. Whereas to buy the same coverage in the endowment plan, he will have to pay a premium of around Rs 2.80 lakh annually. In this plan, at the age of 65 years i.e. after 35 years, he will get a total of Rs 4.98 crore as maturity benefit including sum assured of Rs 1 crore, bonus of Rs 1.68 crore and final bonus addition of Rs 2.30 crore. Whereas in 35 years he would have paid around Rs 98 lakh as premium. That means you will get a profit of around Rs 4 crore on your investment. These calculations are based on the endowment plan calculator of a major insurance company.
Also read: ELSS vs FD: Make regular investments from now on for tax saving, which is better between ELSS and FD?
Combination of term plan + mutual fund
Now let us know what will happen if the same investor of 30 years invests the same amount of Rs 2.80 lakh annually by dividing it into term plan and equity mutual fund? Can it get both higher coverage and returns than an endowment plan? If a 30 year old person wants, he can buy a term plan worth Rs 2 crore through online portals for an annual premium of around Rs 20 thousand. If the remaining Rs 2.60 lakh is invested in ELSS every year through a monthly SIP of Rs 21,666, then even based on a conservative annual return of 12 per cent, the total value of his investment in 35 years will be more than Rs 14.07 crore! Whereas the total amount invested by him during these 35 years will be around Rs 91 lakh. That means he will get a profit of more than Rs 13 crore on his investment. That too after purchasing double the insurance coverage compared to an endowment plan!
Also read: EPFO Advance: If you need advance from Provident Fund immediately, then use the auto mode facility like this.
High returns with better coverage
This calculation is not based on any specific scheme, but is based on a rough estimate of the initial premium given on the online insurance policy selling portal. Therefore, the actual amount at the time of purchasing the policy may be slightly different from this. Still, there will still be a huge difference between the premiums of term plans and endowment plans. A major disadvantage of endowment plans is that due to the heavy premium, many times people are not able to buy as much insurance as they should. The consequences of which may have to be borne by his family in case of any untoward incident. Therefore, the right strategy is to keep insurance and investment separate, so that you can take full advantage of both the best coverage in insurance and high returns in investment. While taking the final investment decision, keep in mind the market risk associated with investing in equity funds.