One sunny afternoon, a local insurance agent, Pranav, went to meet Vimalraj. Pranav pitched about a life insurance policy that would return the money.
This policy, if you take it with an annual premium of ₹20,000, for example, over 25 years, repays your total paid amount back to you with a huge bonus accrued. On completion of the 25th year, you are going to get ₹5,00,000, that is, your total premiums, plus another ₹5,00,000 as bonus. That’s ₹10,00,000. Plus, you will have a death cover as well.
Moved by the double returns concept with a safety net for his family, he was ready to invest in the policy.
The Reality Check:
While Vimalraj was comfortable about his investment in the life insurance policy, his friend Suresh, who was all about investments, gave him a different point to ponder over.
“Vimalraj: Think you would have invested that money in an SIP? Let me show you.”
Returns Comparison:
Life Insurance Policy:
- Annual Premium: ₹20,000
- Total Investment Over 25 Years: ₹5,00,000
- Bonus Amount: ₹5,00,000
- Total Returns After 25 Years: ₹10,00,000
SIP Investment:
- Monthly Investment: ₹1,600 (equivalent to ₹20,000 annually)
- Total Investment Over 25 Years: ₹4,80,000
- Estimated Return at 10% Interest Rate: ₹21,00,000
- Estimated Return at 12% Interest Rate: ₹30,00,000
Investment Comparison Table:
| Investment Type | Annual Premium / Monthly Investment | Total Investment (25 Years) | Returns at 10% Interest Rate | Returns at 12% Interest Rate | Total Returns |
|---|---|---|---|---|---|
| Life Insurance Policy | ₹20,000 (annually) | ₹5,00,000 | N/A | N/A | ₹10,00,000 |
| SIP Investment | ₹1,600 (monthly) | ₹4,80,000 | ₹21,00,000 | ₹30,00,000 | N/A |
Key Points:
Vimalraj, the basic purpose of the insurance policy is to meet the event of death and not to get maximum returns. This death cover cannot be compared with a term insurance policy wherein the cover under such policy would be much higher for a similar premium. An SIP in mutual fund, even at a very conservative 10% return rate, far out performs the returns from the insurance policy. At 12%, the difference is quite substantial.
Understanding the Difference:
Knowing the Difference: Vimalraj was enlightened. He now realizes that mixing insurance and investment is the biggest mistake he ever made in his life. Insurance is for covering risks, while investments, like in SIPs, could help in creating wealth. Therefore, if middle-class people make right choices, then they will be better placed in securing their financial future and maximizing returns.
The story brings out very clearly a common problem amongst the middle class: equating insurance with investment. Sprinkle a little of what one learns or takes advice from people who know the subject to better handle one’s finances in a manner that guarantees both security and growth.
