Are You Confusing Insurance With Investment?

Insurance is a service which is widely discussed, aggressively marketed and hard sold to individuals in recent times. The 2 most common forms of Insurance for individuals are Life & Mediclaim policies. However, in spite of the huge degree of awareness created by the advent of the private Insurance companies in recent years, the level of understanding, by a layman especially of the Life Insurance product has not been very encouraging. This leaves room for insured lending up with wrong type of products not suitable for their purpose.

Major Myth in Life Insurance

Primary objective of life insurance is to hedge oneself against the economical & financial risk in the event of an unforeseen incident. Hence one needs to ensure that he or she is fully covered especially those who are earning members of a family. However instead of focusing on reaching that right amount of cover, we are often waylaid by the marketing personnel by introducing the investment element in insurance planning. Where a simple term policy would easily help achieve your objective of full cover, investment goals & cash flow planning take the front seat often resulting in customer remaining under insured.

Misinformation or Mis-selling

Many investment planners & insurance agents, who basically represent the insurance companies, unfortunately, have left no stone unturned to portray insurance as an investment avenue. ULIP & other investment linked insurance policies are high premium policies since part of the premium goes into equity or debt investment. These are mainly sold on two pretexts, firstly, that the investment growth will take care of the premium payment in the future and secondly that a large amount of lump sum payment will be received by the policyholder at the time of maturity of the Life Insurance policy.

Due to the high premium out flow in such policies as compared to a plain vanilla term policy, the customer is not able to meet his objective of sufficient amount of cover and hence runs a risk of low cover to that extent. As against this, there is a lesser known class of intermediaries, the Insurance Brokers, who are not attached to any insurance company, but in fact, actually represent the insured, and are a good option for policy seekers to approach and plan their cover as they are less likely to be misguided.

The Role of Insurance Companies

While traditionally, insurance has been sold not only as a hedge against risk but also as an investment product, ensuring that the insured meets his/hers prime goal of risk mitigation through term plans before selling them other life policies is crucial. Moreover, they should be transparent enough to make the insured understand the cost of life insurance that is generally built into the premium which consists of investment portion too. This can enable the insured to weigh all the pros & cons and have a right portfolio of life Insurance policies. This is possible only if the insurance companies train their agents, distributors accordingly rather than just motivate them with monetary incentives for selling high premium insurance plans.

Conclusion

Every individual buying a Life policy must first determine the amount which he will be comfortable, leaving behind, that can fully take care of his family. Address his money management & growth requirements through “direct” equity or mutual funds rather than mixing it up with insurance. Choose an Insurance Broker or a trust worthy Agent who can plan a portfolio which is devoid of policies that do not meet his/her objective or which calls for a large commitment in the form of premiums payment for several years to come. Mostly importantly, he/she should think of the worst that can happen no matter how remote the possibility may be and plan his risk cover accordingly.

Lastly, remember that Life insurance policies are long term contracts. So plan wisely.