Why you should stay away from an investsurance scheme?

Investment and insurance are two words which you can't escape from these days. There are a number of insurance policies and investment options today, which have only increased the confusion among investors. Which policy to take? What Investment to make? These are some of the common questions that an average investor is faced with.

I have a friend who used to tell me that traditional policies are the best since they gave protection as well as returns in a single go and that term insurance was useless. I knew that he was a man of stats. So, I decided to prove him wrong with some stats. I gave him a simple comparison of two people named Rajesh and Mahesh who are 29 years old. Rajesh had taken a traditional policy. The details are as follows:

Sum assured: 1,00,000

Yearly premium: 4346

Bonus: 1,37,500

Policy term: 25 years

Payment term: 25 years

Rajesh would be paying a total amount of 1,08,650(4346*25). On maturity, he would be getting a total amount of 1,00,000 + 1,37,500 i.e; 2,37,500.

Now, let us have a look at Mahesh who has taken a term insurance and invested in various equity and debt financial instruments. The details are as follows:

Sum assured: 25,00,000

Yearly premium: 3472

Policy term: 25 years

Payment term: 25 years

Mahesh would be paying a total amount of 86,800. Remember, he is also able to save some amount by taking this cheaper term plan. He is investing that balance amount of 874(4346 - 3472) in various equity and debt financial instruments. Even assuming a most conservative return of 10% p.a in 25 years, he is able to accumulate 11,59,652 which is about 4.88 times the maturity amount which Rajesh got in his traditional policy.

Finally, my friend agreed to my point that Insurance is meant for protection but not investment just like apples are meant to eat but not to play. Hence, stay away from Investsurance. Hope this would help you in not falling for your insurance agent's magical words.

By A.V.Suresh - In-House Financial Planner, Investment Yogi

Courtesy: www.investmentyogi.com