Don’t mix insurance with investment plans’

I have seen people getting confused with the term insurance and investment. These people expect something in return on the maturity from the insurance company. This so because these people hardly understand the importance of insurance and investment. In many cases insurance agent also make the person fool by using the situation in his favour by selling insurance to a person interested in investment.

What is insurance?
Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the insurance; an insured or policyholder is the person or entity buying the insurance policy.

Concept of Insurance / How Insurance Works?
Concept behind insurance is that a group of people exposed to similar risk come together and make contributions towards formation of a pool of funds. In case a person actually suffers a loss on account of such risk, he is compensated out of the same pool of funds. Contribution to the pool is made by a group of people sharing common risks and collected by the insurance companies in the form of premiums.

What is investment?
Investment is the commitment of money or capital to purchase financial instruments or other assets in order to gain profitable returns in the form of interest, income, or appreciation of the value of the instrument. Investment is related to saving or deferring consumption.

Now the question is which insurance is better and why?
As per my view Term Insurance is better. Term Life insurance or life assurance is a contract between the policy owner and the insurer, where the insurer agrees to pay a designated beneficiary a sum of money upon the occurrence of the insured individual's or individuals' death or other event, such as terminal illness or critical illness. In return, the policy owner agrees to pay a stipulated amount at regular intervals or in lump sums. If he outlive the term of the policy, he will get nothing.

Now understand the whole scenario with the help of an example.

Rajesh age is 28yrs at present. He has planned for LIC money back policy. If he gets insurance of 10,00,000 for 20yrs, then he has to pay hefty premium of 62,260 for 20yrs. Which mean his total investment would come around 62,260*20 = 12, 45,200 nearly. He will get 2, 00,000 back every 5yrs and remaining amount with bonus will be paid at the end of the period.

If he plan to get term insurance of 10,00,000 for 20yrs , then he has to pay only nearly 2890 every yr over period of 20yrs which mean in total he will pay 2890*20=57,800. No doubt he will lose this amount if he outlives the policy. But if he dies his dependent will get coverage of 10, 00,000.

So the difference of amount invested in two option is 1245200-57800=1187400. With the term insurance he has the option to invest the remaining amount i.e. 1187400 into some good mutual funds over a period 20yrs.Even if he get the average return 20% his amount will much more (nearly 1 crore).

So, it is clear that one should opt for term insurance and make the investment where there is high return. In this way if anything happens to the person then dependent will have the 10, 00,000 and also the amount which he invested along with the return.

This will assure him of comfortable life for himself and his family whether he lives or anything happens to him.