Are mutual funds better than Insurance policies or should I continue to invest in insurance as it offer more safety of principal, is the question that bothers many investors. Many types of Insurance policies do assure you some safety of principal and assured returns, but their benefits pale when you look at the disadvantages of insurance policies as an investment tool and the benefits of mutual funds as a tool for long term wealth creation.
Life Insurance schemes can be broadly segregated as:
1) Term Insurance.
2) Endowment Plans.
3) Money Back Plans.
4) Whole Life Policy.
5) Unit Linked Insurance Plans (ULIP).
There is also a new breed of Insurance Plans in which Health Insurance is combined with Savings.
In India, Insurance plans are very popular as an Investment instrument. This article highlights why Investors should not consider Insurance Plans as an Investment option.
The only Insurance Plan which is worth the value is Term Insurance, as it is a pure Insurance, with no savings element attached. Because of this, Investors can get Term Insurance at a very low cost for a very high Sum Assured. All the other types of Insurance combine Insurance with savings and hence Investors do not get adequate Insurance cover (as the premium increases drastically) and very low returns.
Also, if you surrender an Endowment or Money Back or ULIP before its maturity, you will not even get the amount you have invested till the time of surrender. This feature is a serious hindrance especially for Endowment and Money Back plans. The surrender value of Insurance policies increases with time elapsed since the purchase of the policy.
ULIPs have a lock in period of 5 years. ELSS (Equity Linked Savings Schemes) of Mutual Funds can earn much better returns, and the lock in period is only three years from the date of Investment. So, if you are planning to invest for Tax saving purpose, ELSS Mutual Funds are a much better choice.
Another feature which reduces the returns from Insurance plans is the high commission paid to Insurance agents and brokers. While a typical Mutual Fund scheme, pays only around 1 percent as commission to its distributors, Insurance Companies pay commission which varies between 10 percent and 30 percent during the first year of the policy. In the subsequent years, Insurance agents get around 5 percent or more of the client’s investment, depending on the type of Insurance plan. Such high commissions severely affect the actual amount invested by the investor.
Another point worth mentioning is that, while the performance of Mutual Fund schemes are tracked by several Newspapers and Magazines and other bodies, the performance related information of ULIPs and other Insurance plans is only available from the Insurance Company and only for its own plans. There is no standard or external body or publication, which tracks the performance of Insurance plans. This is another major limitation of Insurance plans, especially ULIPs.Investors should also stay away from Health Insurance schemes which offer a savings component as usually the Health cover is only provided to a certain percentage of the amount Invested over a number of years. Also as a general rule, insurance whether Life or Health should not be used as a means for saving and growing money
Article Originally Written in March 2019.
Mungekar Wealth 