Comparing Life Insurance & Investment Plans

Nutan Gupta

05 Oct 2016

It’s very common to find people quoting about their insurance policies, when asked about investments for future. This is because of a misunderstanding that leads most people to take wrong financial decisions.

Even though people use the terms Investment and Insurance interchangeably, in reality they are not similar. Insurance is a product that covers the risk of policyholder’s death by paying lumpsum benefits and helps financially secure the dependents. Investment on other hand is used for wealth creation and to provide for additional sources of income in future. So to put it very simply, investment is about growth whereas insurance is about financial security.

Unfortunately, there are many hybrid financial products that offer both insurance as well as investment benefits. Though it might look attractive to handle both aspects of personal finance using just one product, fact is that these products are mostly expensive and return on investment is also quite less, when compared with other pure investment plans. People tend to avoid plain term insurance plans because they are not used to the concept of 'No benefit' in case of policyholder’s survival. But what they forget is that plain term plans are very cheap when compared to hybrid products and money saved on premiums can be invested in pure investment products.

People tend to avoid plain term insurance plans because they are not used to the concept of 'No benefit' in case of policyholder’s survival. But what they forget is that plain term plans are very cheap when compared to hybrid products and money saved on premiums can be invested in pure investment products.

Let’s take an example to better understand it.

As of today, you can buy a hybrid product (insurance+investment), which gives a cover of Rs 5 lacs for an annual premium of Rs 30,000. Compare this with a term plan of Rs 50 lacs that you can buy for just Rs 5000. So essentially, you are getting a 10 times bigger insurance cover for 1/6th the price. You might argue that you won’t get any money on survival in term plans. But you can always save the difference amount (Rs 30,000 – Rs 5000 = Rs 25,000) in pure investment products every year. That will take care of investment part.

This is a very simple reason why it makes sense to keep insurance separate from investments. But beware that insurance sellers will try very hard to push hybrid products as it offers higher commission. So make sure you understand why it’s beneficial to go for term plans.

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mutual-fund

Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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Comparing Life Insurance & Investment Plans

Nutan Gupta

05 Oct 2016

It’s very common to find people quoting about their insurance policies, when asked about investments for future. This is because of a misunderstanding that leads most people to take wrong financial decisions.

Even though people use the terms Investment and Insurance interchangeably, in reality they are not similar. Insurance is a product that covers the risk of policyholder’s death by paying lumpsum benefits and helps financially secure the dependents. Investment on other hand is used for wealth creation and to provide for additional sources of income in future. So to put it very simply, investment is about growth whereas insurance is about financial security.

Unfortunately, there are many hybrid financial products that offer both insurance as well as investment benefits. Though it might look attractive to handle both aspects of personal finance using just one product, fact is that these products are mostly expensive and return on investment is also quite less, when compared with other pure investment plans. People tend to avoid plain term insurance plans because they are not used to the concept of 'No benefit' in case of policyholder’s survival. But what they forget is that plain term plans are very cheap when compared to hybrid products and money saved on premiums can be invested in pure investment products.

People tend to avoid plain term insurance plans because they are not used to the concept of 'No benefit' in case of policyholder’s survival. But what they forget is that plain term plans are very cheap when compared to hybrid products and money saved on premiums can be invested in pure investment products.

Let’s take an example to better understand it.

As of today, you can buy a hybrid product (insurance+investment), which gives a cover of Rs 5 lacs for an annual premium of Rs 30,000. Compare this with a term plan of Rs 50 lacs that you can buy for just Rs 5000. So essentially, you are getting a 10 times bigger insurance cover for 1/6th the price. You might argue that you won’t get any money on survival in term plans. But you can always save the difference amount (Rs 30,000 – Rs 5000 = Rs 25,000) in pure investment products every year. That will take care of investment part.

This is a very simple reason why it makes sense to keep insurance separate from investments. But beware that insurance sellers will try very hard to push hybrid products as it offers higher commission. So make sure you understand why it’s beneficial to go for term plans.