Insurance is not an investment

In India insurance is generally mistaken for investment. The guys in the IT industry are a suckers for insurance, believe me, I work there. Come December and everybody is hurrying up to take on new insurance plans to save tax. “Hey Naveen, I have taken up this policy to invest money and save tax” and the guy is not even married. Now before I go overboard in mocking everybody who has done this, let me say that I too have been doing the same. But now that I am over insured and needlessly allowing the top insurance companies in India to take a significant portion of my salary I have realized what a jackass I have been. Now that my eyes are opened I am re-evaluating my insurance needs. After I complete this excercise, I plan to re-structure my insurance accordingly. But for now I am going to tell you a few things about insurance.

1. Life insurance is a risk mitigation strategy you adopt when you have some liabilities ( loans, debt etc). So if you don’t have any loans and are unmarried then don’t take insurance.
2. Health insurance is a must for all. period. There is no alternative to it. If you are not married yet and have dependent parents then you can take a health insurance policy for your parents. Whats more, you can even save some income tax on it!! Beware of sales guys who sell you policies that cover only common illness. You don’t need health insurance to cover common cold. Buy one that covers dangerous, life threatening dieseases and those that cost a bomb to treat.
3. Money back policies are expensive and they only payback what you have paid as premiums. You don’t get much out of the bargain in case nothing happens to you till the policy gets expired.
4. Term insurance is the cheapest insurance. Most people shy away from term insurance because you don’t get anything back after the policy expires. But thats not the reason why you take insurance (Refer point no 1).
5. The price difference between the premiums you pay for a term insurance compared to a money back policy is generally in the range of 1:6 or more. So you are better off taking a term insurance and investing the additional amount in other asset classes like stocks, mutual funds, bonds etc for better returns.

If you are still not convinced, you can find expert advice here.

So the next time you plan to take a insurance policy, decide and choose wisely.

Let me know about what you think on insurance and investment in the comments.

Filed under: insurance, personal finance , insurance, investment, personal finance