Investments and Insurance - you need both, but ideally keep them seperate

Investing and insuring are two important aspects of financial planning that can help you achieve your long-term goals and protect yourself and your loved ones from unforeseen risks. 

Investments are financial instruments that help you grow your money over time and generate returns that can beat inflation and create wealth. There are various types of investment options available in India, such as mutual funds, stocks, bonds, fixed deposits, public provident fund (PPF), national savings certificate (NSC), post office monthly income scheme (POMIS), government bonds, etc. Each of these options has different features, benefits, risks and returns. Depending on your risk appetite, time horizon, financial goals and tax implications, you can choose the best investment option for yourself.

For example, mutual funds are market-linked securities that offer high returns on investment but also carry high risks. They are suitable for investors who have a long-term horizon and can tolerate market fluctuations. On the other hand, fixed deposits are fixed-income products that offer low returns on investment but also carry low risks. They are suitable for investors who have a short-term horizon and want guaranteed returns.

According to Statista, the top investment options in India for 2023 are:

• Public Provident Fund (PPF)
• National Savings Certificate (NSC)
• Post Office Monthly Income Scheme (POMIS)
• Government Bonds
• National Pension System (NPS)
• Equity Linked Savings Scheme (ELSS)
• Mutual Funds
• Stocks
• Gold
• Real Estate

Insurance is a financial product that helps you cover the risk of loss or damage to your life, health, property or assets due to unforeseen events such as accidents, illnesses, natural disasters, thefts, etc. There are various types of insurance products available in India, such as life insurance, health insurance, motor insurance, home insurance, travel insurance, etc. Each of these products has different features, benefits, premiums and coverage. Depending on your needs, liabilities and budget, you can choose the best insurance product for yourself.

For example, life insurance is a product that pays a lump sum amount to your nominees in case of your death. It helps you secure the financial future of your dependents and cover your liabilities. Health insurance is a product that pays for your medical expenses in case of hospitalization due to illness or injury. It helps you cope with the rising cost of healthcare and avoid financial stress.

According to IBEF, India’s insurance penetration was 4.2% in FY21, with life insurance penetration at 3.2% and non-life insurance penetration at 1%.

While both investments and insurance are essential for your financial well-being, they serve different purposes and should not be mixed up.

Mixed financial products, which combine insurance and investment features, have become increasingly popular in India in recent years. One of the primary reasons for this trend is the aggressive marketing campaigns undertaken by financial institutions, which promote the supposed benefits of these products. Additionally, the high commissions offered to agents who sell these products also serve as a significant incentive for them to push these products to unsuspecting consumers. However, the reality is that mixed financial products are often not the best option for most consumers. These products are usually complex and can be difficult to understand, leading to confusion and potential loss of investment. Furthermore, the returns on these products are often lower than what one could expect from investing in a purely investment-focused product, making them a poor choice for those looking to grow their wealth. 

So, what exactly are mixed financial products? These are essentially hybrid products that combine insurance and investment features. The investment component of the product can either be in the form of a return of premium for an insurance plan or a unit-linked insurance plan (ULIP). In contrast, the insurance component can be in the form of term insurance, endowment policies, or a combination of both. The idea behind these products is to provide both investment growth and insurance coverage to the consumer, making them an attractive option for those looking to do both. 

However, these products may not be effective or efficient for the following reasons:

• They have high charges and fees that reduce the returns on investment and the coverage on insurance.
• They have low transparency and flexibility as you cannot choose the funds or the sum assured according to your preference.
• They have a lock-in period of 5 years or more that restricts your liquidity and exit options.
• They have a low sum assured that may not be adequate to cover your life risk or liabilities.
• They have a low return on investment that may not beat inflation or generate wealth.

The low return of mixed financial products is the kissue. In most cases, the return offered by insurance policies with investment components is very low, typically ranging from 2% to 4%. Take, for example, a return of premium insurance product that promises to return the sum or a full portion of the insurer's money. While this may sound attractive, it never factors in the "time value of money". As a result, subscribers may end up paying extra premiums for a return that is substantially lower than what they could have earned had they invested the money elsewhere. Also, did you know that the average inflation rate in India was 5.9% in 2022? That means your money lost more than 6% of its purchasing power in just one year. If you are earning anything less than 6% you are not contributing to wealth creation. 

By investing & insuring separately, subscribers have more control over their money and can earn significantly higher returns for investments & get better protections through focused insurance products. For instance, consider a term insurance policy with a yearly premium of 37K for 15 years of premium-paying years, covering a duration of 50 years. The same company offers a return of principal (47K x 15 years = 7.1L approx) of premium of 47K for the same duration. However, if a subscriber invests the extra 10K separately for 15 years in an FD or an index fund and keeps it for 50 years, it could amount close to 25L (if you have it in an index fund with RoI of 9%, then accumulated amount can be a staggering 60L). This shows that investing separately can be a more profitable strategy in the long run.

A simple and effective way to invest your money continously in a systematic way is to follow Warren Buffett’s advice of allocating 90% of your money to an index fund and 10% to safe and liquid debt instruments (such as liquid funds, govt. bonds, govt. T-bills, and bank FDs). This strategy can help you earn steady returns over the long term.

Warren Buffett on How To Invest for Beginners 

In Indian context, that would be investing 90% in an Index fund like SENSEX and 10% in any of the debt instrument like bank FD or a liquid fund. According to freefincal, in the last 44 years, SENSEX has given a annualized return (CAGR) of 15% not inluding dividends.

Proven principle: It is essential to note that everyone's financial situation is unique, and there is no one-size-fits-all solution. However, there are some general principles that individuals can follow to secure their financial future. 

• Firstly, one should consider taking health insurance to protect their and their family's health. This will cover any unforeseen medical expenses and give peace of mind. 
• Secondly, taking a life cover (preferably a term insurance) is crucial to ensure that the family's interests are protected in case of any unfortunate event. 
• After taking adequate protection, individuals should start investing early for wealth creation and retirement planning. They can consider investing in a systematic way in mutual funds, stocks, NPS, FDs, or other investment options that suit their financial goals and risk tolerance. 
• Finally, they can think of taking special insurance like cancer cover to provide additional protection for specific risks.

Conclusion: While mixed financial products may seem like an attractive option, they often come with low returns and misleading promises. By keeping investment and insurance separate, subscribers have more control over their money and can earn significantly higher returns. Following simple investment advice and protecting life and health with insurance are good strategies to ensure a secure financial future.

If you want to research more on the topic, you can check out these articles from external sources:

• Economic times: Do you still buy insurance products for your investment needs?
• Forbes: Why Investing And Insurance Shouldn’t Mix (Despite What TikTok Says)
• Livemint: Why you should not mix insurance with investment
• FinancialExpress: Explained: Why insurance is not an investment

You need both, but keep them seperate

It's always a good idea to do your own research and consult a financial advisor before making any investment and insurance decisions. This article is not an advice and is solely our point of view. We hope that it has provided some useful insights into the benefits of keeping your investments and insurance separate.