Insurance vs Investment
We often mix insurance and investment. Infact, many people try to kill two birds with one arrow. We think that we are getting double benefit of both insurance and investment.
However, this is a fallacy, and a big money making scam that has helped big financial institutions including LIC and Bajaj make a lot of money.
What is insurance?
Insurance is a safety net, which helps you in case of a crisis. The crisis can be pure economic, or it can be health related or life related. The insurance product can be a policy from a financial institution or it can be cash hidden in your home or it can be even your own jewellery. Your friends, and family can also act as your informal insurance partners (and you will have to act theirs).
What if there is no crisis in your life for next 30 years? The amount you paid to buy that insurance product would have lost most of it’s value in 30 years, compared to the risk free rate/inflation in the country. This is how insurance works!
Why would a financial company sell an insurance policy and give you returns more than the inflation? The insurance company would go bankrupt! The company insures you by the difference of the actual return it generates from your money, and the money it pays you back on maturity. If this return (paid back to you) was more than inflation/risk free rate (8-9%), the insurance company would not find any reason to insure you? (the purpose of the insurance company is to generate returns for the share holders)
In addition, the insurance company pays a hefty fees to the agent as an incentive to sell. This may vary from 20% to 60% of the premium paid. The agent also has his family….no? The rest of the amount is invested by the insurance company in stock market and govt/company bonds/fixed deposits.
The returns generated from this investment are used for the following:
On top of it, insurance companies have created new complex financial instruments called Highest NAV plans and complex forms of ULIPS etc.
Highest NAV plan is mostly a debt instrument, wherein most of your money is kept in fixed deposits, and a minority (10-20%) is invested in the stock market. I hope you understand that the value (NAV) of your fixed deposit increases every day, and every year, and is at highest value(NAV), whenever you withdraw. Why would you pay the agent(initial hidden commission) and a financial company (annual hidden fees) to invest your money in fixed deposits? Smelling false promises, and thus a scam here!
We need to keep our insurance and investments separate, and should not invest in insurance, or seek insurance in investments!
We often mix insurance and investment. Infact, many people try to kill two birds with one arrow. We think that we are getting double benefit of both insurance and investment.
However, this is a fallacy, and a big money making scam that has helped big financial institutions including LIC and Bajaj make a lot of money.
What is insurance?
Insurance is a safety net, which helps you in case of a crisis. The crisis can be pure economic, or it can be health related or life related. The insurance product can be a policy from a financial institution or it can be cash hidden in your home or it can be even your own jewellery. Your friends, and family can also act as your informal insurance partners (and you will have to act theirs).
What if there is no crisis in your life for next 30 years? The amount you paid to buy that insurance product would have lost most of it’s value in 30 years, compared to the risk free rate/inflation in the country. This is how insurance works!
Why would a financial company sell an insurance policy and give you returns more than the inflation? The insurance company would go bankrupt! The company insures you by the difference of the actual return it generates from your money, and the money it pays you back on maturity. If this return (paid back to you) was more than inflation/risk free rate (8-9%), the insurance company would not find any reason to insure you? (the purpose of the insurance company is to generate returns for the share holders)
In addition, the insurance company pays a hefty fees to the agent as an incentive to sell. This may vary from 20% to 60% of the premium paid. The agent also has his family….no? The rest of the amount is invested by the insurance company in stock market and govt/company bonds/fixed deposits.
The returns generated from this investment are used for the following:
- Marketing and advertising of the insurance company policies
- Salaries and bonuses of the permanent employees (agents already got 20-60% commission)
- Generation of net profit for the shareholders
- Insuring you and your family
- Processing fees, and payment of fees to the TPAs
On top of it, insurance companies have created new complex financial instruments called Highest NAV plans and complex forms of ULIPS etc.
Highest NAV plan is mostly a debt instrument, wherein most of your money is kept in fixed deposits, and a minority (10-20%) is invested in the stock market. I hope you understand that the value (NAV) of your fixed deposit increases every day, and every year, and is at highest value(NAV), whenever you withdraw. Why would you pay the agent(initial hidden commission) and a financial company (annual hidden fees) to invest your money in fixed deposits? Smelling false promises, and thus a scam here!
We need to keep our insurance and investments separate, and should not invest in insurance, or seek insurance in investments!
Happy investing
Source:Valueinvestor.com
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