Are Investments made in Insurance Policies good enough for Children Education and Retirement?

Mr. Pandya(Name Changed to protect privacy) a senior accountant in a leading corporate who attended my Financial Literacy Seminar in his company and approached me for his financial health checkup. On examining his investments and insurances, I found his entire investments into various Moneyback and endowment Life Insurance Policy yielding approx 5-6% returns per annum.

During the financial health checkup, while interacting with him, I found he was investing 30-40% of his salary every year for a greater period of his working life. That was not less savings. After mapping his investments to his financial goals of Children Education, Marriage and Retirement, he was falling short of the required corpus. Obviously, his real returns after inflation were negative.

While Probing further, he revealed that his brother-in-law was an insurance agent and sold him various policies during Financial Year end and he bought the same with understanding and expecting triple advantage of saving tax along with investments for future goals and insurance.
But in reality, he was not having adequate insurance as per his Human Life Value Calculations ( A calculation to determine precise insurance requirement) and his investments were also not generating enough corpus to fulfill his requirements. He was losing on both fronts.

The reason for the above situation was he bought money back/endowment investment policies where in a larger portion of the premium paid goes towards Fixed return investments by Insurance provide which generally yield returns of 5 to 6% ( less than past 20 years average government inflation of 7.5% and Lifestyle inflation of 10-12%) and small part of premium goes towards mortality charges ( charged by Insurance company to provide life cover in case of death) and since this charge is low, insurance cover are also low.

Its not the story of Mr. Pandya alone, a greater numbers of Investors are Mixing Investing with Insurance and continue to loose on both the requirements.

This happens because of lack of Personal Finance Literacy and Mis Selling being done by Insurance Agents who prefers to sell Moneyback/Endowment Plan as against pure term insurance plan keeping higher Commissions earnings in moneyback/endowment plans in mind.

The best way to save from such thing to happen in your life ;

1. Never mix Insurance and Investments.
2. Consult a Fee Base Financial Advisor to get your risk profiling done and do proper asset allocation based on your risk profile.
3. Also consult fee based financial advisor to get your very own personal Financial Plan Prepared.
4. Invest in a diversified portfolio comprising Fixed Returns and Market returns’ asset classes that help you generate good tax efficient returns that help you achieve the required corpus for your future goals and retirement.
5. Buy a term life insurance plan before starting an investments plan

The reason I have advised to consult fees based advisor as he does not earn from commissions for selling investments product to you so he would never recommend product keeping his higher commissions earnings in mind, hence you will receive conflict free advise which in turn will protect you from any wrong/miss selling.

I have prepared a Protection Plan , Investment Plan and retirement Plan for Mr. Pandya after administering a risk profile and preparing an asset allocation strategy for him

Now he is on his way to achieve his financial goals and worry free retirement.

So summing up, never mix up investment and insurance as it will lead you to lose in both your requirements. Even Market linked insurance policies , known as ULIPs, also suffer from huge expenses being deducted upfront. ULIPs expense ratios are as high as 10-12% and are front loaded , means if you pay Rs. 100 premium, only 88% would go for investments, resulting in poor returns in initial 5 years.

It is better to buy term life insurance policy and Invest in Equity Mutual Fund as Expense ratio for Mutual Fund has upper limit set by SEBI at maximum 2.5% and it is charged back loaded, means if you invest Rs. 100/- entire 100 would go to market and charges are deducted after a year after generating returns for you. Never miss a chance to improve your financial literacy to at least save from mis selling happening to you. Better to consult a fees based financial Advisor to receive conflict free advise.