Insurance and investment awareness

Insurance has different connotations for different people. For a financial sales person it means insurance premium targets to be met, for a family man, its a sense of security for his family and for some others it might be one of the options of saving on tax without much consideration for the real purpose of insurance as they do not see the need for it.

However it think it is important for everyone to understand that the real purpose of insurance is to provide for uncertainties and unexpected negative outcomes. The risk appetite differs from individual to individual and accordingly financial consultants recommend different classes of assets with different riskiness. Ones investment in insurance should also reflect one's risk appetite. At the forefront i would like to highlight that there should be a clear cut distinction between investment and insurance. ULIP is one product which was the baby of the financial industry and offered the investors a mix of both worlds - investment and insurance. Infact many ad taglines highlighted this issue - "investment bhi, insurance bhi, dono saat saat".

What a layman fails to understand is that he is falling short on both fronts, investment and insurance. The ULIP offers very low insurance coverage and also a significant proportion of the money put in goes as expenses in the first three years of the coverage, thus reducing the investment value as well. Infact the ineffectiveness of ULIPs can be felt in bearish markets when you realise that the insurance coverage on the ULIP is very low and would not be sufficient to meet the needs of your family in your absence and the NAV has also fallen sharply so your portfolio investment value has also eroded. I would say ULIPs are more suited for bullish markets but that too are better investment vehicles rather than insurance.

Always buy one pure term plan for your insurance needs and have investments in mutual funds if you cannot manage your equity portfolio yourself. Infact i would say ETFs (Exchange Traded Funds) clearly stand out as a better option to mutual funds also. It has been observed over a large sample size over 15-20 years time period that very few mutual funds could actually outperform the benchmark indices. ETFs provide you returns which are in line with index return and have very low margin of error. There is no entry and exit load and you only pay the brokerage like any other equity transaction, which is minimal. Doing an SIP into ETFs is a wise idea and you do not need fund managers to manage your money.

Now coming back to insurance, realise that have an insurance for every liability and every asset. Insure your assets like home, car, life, etc. Also insure your liabilities like home loans and other loans. But then also avoid over-insurance as then you might just end up paying premiums which could be avoided. Understand your risk taking capacity and your assets and liabilities and act accordingly. If in doubt contact your financial advisors, but don't take any product they push without understanding its implications....