(There are 2 questions every 2 months, please do check http://www.bimaworld.com/blog/questions/start.html and add your opinion. Every answer matters and add values. Please contribute)
1st Insurance Question of the month is “Should one mix up insurance with investment? why yes and why no”. If I have INR 1,00,000 per year for investment, insurance and other savings how should I balance my investment and insurance.
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Insurance and Investments are two different things. Insurance depends on your economic value to your family. Investments depend on your surplus income and your financial goals. So, to my mind, mixing up the two is misleading.
But in India, this mix up is common place. So even though the question asked may be misleading, it really begs for an answer!
So if I have Rs 100000/- with me, I would first figure out the amount of cover that I require. I will take my annual income, multiply it with 8*, add liabilities and reduce assets to arrive at the figure.
Let’s take an example: Annual Income: Rs 5 lacs, Assets: Rs 10 lacs, Liabilities:Rs 5 lacs. So my approximate cover would be 5*8+5-10 = Rs 35 lacs.
*There are a lot of variations in calculation of the insurance cover by the Insurance companies. Multiplying the annual income is the most debated one. I use 8 years because I feel that this is enough for my family to start generating income on their own after a gap of 8 years.
Some Insurance Companies recommend multiplying the annual income by 18-20 times! There would be a real hazard of doing away with the spouse!!
Now for an Insurance cover of Rs 35 lacs, there would be a range of products that could cost you from approx. Rs 10-15000/- to over Rs 1 lac.
I would recommend taking a term insurance cover for Rs 35 lacs paying a term premium of Rs 10-15000/- and invest the balance in low cost Mutual Funds/ETFs.
But I would also recommend checking out your risk profile and relevant asset allocation rules before you go on to invest your money.
I like to answer it this way .
Investments is something which will help us in Future , Insurance in some thing which will help us from today itself. People who have financial dependents , they need to first cover themselves without fail at any cost , because Insurance will take care of their loved ones if something happened to them “NOW” , Most of the people who are without Insurance concentrate on Future , they plan for future expenses , child education and things like that , but fail to realise that they are risking their family to Financial risk in that current moment . They can have excellent investment Strategy or plan , but its of no use because what if the bread-winner is gone in short term .
The mix in Insurance and Investments much be such that it can answer the both question
Quesiton 1 : Is current Financial risk is covered ?
Question 2 : Is Future Financial Risk is covered ?
IF answer to both is YES , then i would call it a good balance , We dont need Only excellent Investments or Only excellent Insurance , What is required is good mix of Insurance and Investments which can cover Risk of loss of key bread winner and Risk of not reaching your Financial Goals .
If one has 1,00,000 , one has to first pay his insurance premium of Term cover (whatever is the best cover) and then rest money can be invested through SIP in good mutual funds for long term for each financial goals .
I like SBI and Religare term plans , they are cheap and good plans .
Manish
Hi Ranjan,
Thanks for the comment, we will display the comments only after 15th of Aug, we also wanted to talk about ulips (where common people think it as a great option for investment and insurance together).
Regards,
Neha, Moderator
One should never mix up insurance and investments, both are 2 different things. If you need insurance go in for pure term plans and for investments you can go in for combination of equity & debt mutual funds, ppf, nsc, mis and so on to suit your needs.
Lloyd
Q: “Should one mix up insurance with investment? why yes and why no”. If I have INR 1,00,000 per year for investment, insurance and other savings how should I balance my investment and insurance.
ANS : yes, nowadays insurance company offers, insurance + investment like LIC’s MONEY,MARKET PLUS… If we invest money in any mutual funnds we benifit only Mutual funds.
But we invest money in insurance company”s e.g..MONEY,MARKET PLUS… scheme our benefit is double.
If your income is 1,00,000 per year only you should invest RS.10,000 per year in that type of policy.
Partly Yes Partly No.
Today interest rates are decreasing on Investments. Hence, return on investment has gone down for the Banks and Insurance which are twin pillars of commerce. Other factors does plays its role but the physcology of the investors always governs the market trend. Note, Indian masses are less risk oriented and more investment inclined.
For example, term assurance plan for 25 lacs would be avialble for approx Rs. 8000 for a period of 25 years for the age group upto 30 Yrs. Even then the nos of term assurance policies sold compared to high premium return orinted plans is very less.
Insurer have made a note of this trend and today products sold are more investment clubbed. But remember insurance is a Life Contingency planning for :
A.) Early Death
B) Accidental Death
C) Sudden Need
D) Long Living
Now regarding investment of Rs. 1 lakh, the break-up can be:
Insurance -45%
Mutual Fund - 35%
Share Market & others-20%