The aim of an insurance is to protect one against financial risk. Life insurance helps in securing the future of your loved ones in the event of your demise. Based on the structure of the policy, life insurance can be divided into two types namely Traditional Whole Life and Term Life Insurance plans.  

Different types of insurance policies:

Whole Life Insurance is a plan that covers the policyholder over his life. It has no fixed term and the policyholder will pay the premium till he is alive. The benefit of this plan is that the payout is confirmed as opposed to the Term Life Insurance plans. There is no predetermined term of the insurance policy in the Whole Life Insurance plan. The person gets the benefit of the cover of the policy till he is alive. The corpus is paid out to the family in the event of the demise of the policyholder.

Term Life Insurance is a plan with no savings or profit component. They are the most basic form of insurance plans out there. These are pure risk cover plans and have lower premiums than the others. A sum is assured by the policyholder in a policy term. The sum is paid to the beneficiaries in the event of the demise of the policyholder but only if it happens inside the term. If the policyholder survives the term, there is no payout.

Benefit of policies like ULIP:

The Term Life Insurance plans have been altered in the recent times to include a maturity benefit and added payments. Examples of the same are the Endowment plans, the Unit linked insurance plans (ULIP) and the money back policy. The endowment plan invests the money of the policyholder in asset markets, debts or equities. Unit linked insurance plans too, invest in the assets but here the policyholder can choose the allocation of the investments. Money back policies are another variant of the Endowment policies.

Insurance as a tool of investment:

This is where the topic of insurance gets a little confusing because now the focus has shifted. These later policies treat insurance as an investment, an avenue to grow your money and chosen over similar other options. From here on out the insurance policies aim to compete with other investment instruments such as mutual funds or even post office deposits. Granted both insurance and investments have some similarities. Like in both of them money is being given to financial service provider keeping an eye on the future. But the end product desired from both is completely different in its entirety. Hence the similarity between them ends with the transfer of the money to a financial service provider.

The insurance if further pursued as an investment avenue comes with some serious drawbacks.

Lock in period:

The money deposited in an insurance policy is locked in for a long period of time. This renders the investor unable to get his hands on the money when he needs it. Among most investors, funds for investment are raised after setting aside some savings. These savings may or may not cover sudden life changes faced by the investor. In such a case the investor should have access to all of his funds. In the endowment plans or ULIPS, this simply won’t be possible due to the structure of the plans.

Lack of transparency:

The backbone of any financial service is the transparency provided. Malpractices, inefficiency and poor performance all stem out of lack of transparency. In other investment instruments like the mutual funds, all the information pertaining the funds or their decisions are passed on to the investors. But due to the structure of the insurance plans that are being treated as investment options here, this information does not make it to the policyholders.

Insurance agent commission:

The commissions too that the insurance agent earns when he scores an endowment or a ULIP policy are enormous. They can be as high as 15% of the first year premiums, 7.5% of the second year premiums and 5% of the third year. These numbers are pretty steep for a financial product being considered as an investment. Due to these facts, there are even safe investment options out there that are better than the insurance alternatives.

To sum up, view insurance policies as an investment only if you lack the necessary discipline required for the markets and are reluctant to hire an expert. And never combine insurance and investment in a sentence without a negation between them. 

]]>