Life Insurance has been prominent savings vehicle for the middle income professionals in India despite the fact that insurance and investments should never be mixed.
Before the introduction of Unit Linked Insurance Plans (ULIPs), Insurance industry in India was offering only three products: term policies, annuities and non – linked policies. Despite the obvious benefits of term policies, they have always attracted lesser interest compared to the other products.
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Annuities and non – linked policies were always promoted as long term investment products which provide guaranteed returns and they attracted many subscribers. Introduction of ULIPs redefined the insurance industry in India.
The three year lock in period feature of ULIPs was misrepresented to the subscribers by the insurance agents. It was promoted as an investment option which can provide good returns in a short time period.
The premiums collected by ULIPs as a percentage of total premiums collected by the insurance industry, ULIPs were accounting for three fourths of the Insurance Industry during 2007-2008. The factors which prompted the raise of ULIPs in India are the incentive structure for the insurance agents and behavioral nature of the individuals.
Insurance agents received higher commissions on the new unit linked policies. Behaviorally we assume that insurance is a safest investment. Taking advantage of the behavioral bias of the individuals, ULIPs were promoted as investment vehicles which would increase the premium amount by multifold over a short period.
Common man who is unaware of the dynamics of the product opted ULIPs in the chase of higher returns in shorter time frame. Though there is no empirical evidence of the loss incurred by ULIP subscribers, the losses bagged by them were significant.
Lately, ULIP holders started correcting their past decisions. As per IRDA statistics, among the surrendered insurance policies, ULIPs accounted for 97 percent in the year 2011-2012 where as it accounted for 98 percent during 2010 – 2011.
Though the ULIP policies have seen a reduced traction in the past of couple of years, still the premiums paid towards account for 24 percent of the total premiums collected by the insurance industry in India. The basic premise of considering insurance as investment in itself is flawed.
The objective behind opting for life insurance is transferring the risk. It ensures that the goals of the family are achieved in case of any mishap to the bread winner of the family. The risk of this mishap is transferred to the insurance provider. While insurance policy negates risk, investments induce risk. It is not an advisable practice to mix insurance and investments.
The fusion of insurance and investment results in higher cost and lower risk coverage. A comparison of term insurance and other insurance products would give us more insights in this aspect. For a given insurance cover, the premium paid for a term insurance policy is significantly lower than the premium paid for other insurance products.
For a given amount, the returns from a well-diversified portfolio are higher than the returns received from the insurance products. The charges involved with the non – term insurance policies are also significantly higher. These charges have a major say in deciding the premium we pay for the life insurance and the related benefits.
Don’t let your good money chase the bad money. Always stay away from mixing investment and insurance.
Written By Arthayantra