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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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How much should I invest in Insurance?

Posted by Muthu on October 19, 2010

I face this question often and it always amuses me.

Insurance companies, mainly LIC for the last 5 decades or so has convinced the common man that Insurance and Investment go hand in hand.

They are very successful in this propaganda.

“There is no insurance without investments.”

“One should atleast get ‘some returns’ from one’s Insurance.”

We have become victims of the above propaganda.

When I was working in BPO, I used to see appearance of insurance agents in the campus from December onwards selling insurance as investments for claiming tax benefits. All the well educated ladies and gentlemen eagerly lapped up these policies.

Insurance companies have been clever to exploit our nature of expecting returns from insurance.

Infact we loose sight about insurance cover and instead worry about how much we would receive, if we live. We never think what will happen if we die. If there is no possibility of death, then there is no need for insurance itself. We have to take insurance because life does not comes with any guarantee.

Do you know that traditional policies like Endowment, Money back, Whole Life etc. gives you an annualized return of only around 5.5% to 6%? Is this what you would call as a good investment?

Considering the average rate of inflation to be 6%, you are earning nothing out of all the hefty premiums you are paying. Have you ever questioned this?

Are you aware of the fact that your insurance agent gets around 35% of your first year premium as income? The second and third year income may hover around double digits and from fourth year onwards he continuously earns 4% to 5% as renewal commission.

Your insurance agent almost earns how much you would earn from your insurance policy.

ULIPs in the old avatar were a day light robbery. Now in its new avatar too, it has not changed significantly.

There is no portability in ULIP, which IRDA says might come in future.

Assuming you’ve portability, the charges are still highly front loaded. You stand to loose if you change the fund manager (insurance company) within first 10 years of the policy period.

Combining investment with insurance is definitely helpful, for your agents and insurance companies.

Think about yourself.

A pure term policy for a 30 year old for a cover of Rs.1 Crore may not exceed Rs.1500/- a month. For the same premium amount, you would not get from any other policy, even a fraction of the huge cover mentioned above.

Remember, you take insurance only for an unexpected contingency. It is not worthwhile to speak of it as an investment at all, if you happen to live.

Till the year 2000, insurance was sold as ‘tax product’. From the beginning of this decade, it is being sold as an ‘investment product’.

Insurance is never sold as a product to cover risk, which is what it is actually meant for.

It is pathetic that such a misselling is accepted almost as a way of life in our country, you the end customer neither get an adequate insurance cover nor a good piece of investment.

Next time, some one tries selling you a policy other than ‘term insurance policy’, offer him a good cup of coffee and then politely ask him to leave.

If you are going to take any other policy out of pity, because the agent happens to be a relative or friend, accept my heart felt sympathies. 

Be careful with your auditors, for they may be the primary point for misselling insurance. Some auditors take insurance agency in the name of their wife and sell you the product which fetches them higher revenues. These auditors respect professional code and ethics, which is why the insurance agency is always in the name of the spouse, who may not even know the basics of insurance.

Tell me, how many of your auditors, oh, sorry, auditors’ wives have sold you a term insurance policy?  Some auditors, again I’m sorry, auditors’ wives are the MDRT (Million Dollar Round Table) agents, mostly by selling policies other than term insurance.

Wouldn’t it be better if these auditors stick only to their area of business instead of becoming product peddlers?

As a thumb rule, avoid taking an insurance policy from your auditor. You would thank me in future for this one piece of advice.

If you still want to oblige your Auditor, tell him that you would not take anything other than term insurance. If all his clients are going to tell the same, he may even surrender his insurance agency and focus only on his profession. Good for all.

I’m not against Chartered Accountants from becoming insurance advisors. Let them then take insurance advisory as their main profession instead of practicing as auditors.

Criticisms are most welcome for this article from misselling insurance agents and the auditors.

3 Responses to “How much should I invest in Insurance?”

  1. Girish Sidana said

    I am not a financial planner but out of my own experience and learnings, I have written a article on Insurance. It endorses the views above. Read it here http://www.drvijaymalik.com/2015/04/life-insurance-why-when-what-how.html

  2. Sathia said

    Not all the CA’s are auditors. Ethical standards are part of auditing profession. The characters of the above articles are Certified Accountants and they are not auditors in my opinion.


    We have not taken life insurance as such, except health insurance. We believe to see investments grow and utilize it when we both are alive, not survival of one later. Mutual funds are alone our investment since 15years.

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