Insurance as an investment vehicle

We have discussed the need of covering risk and how does one ascribe a value for it. Covering risk is foremost for financial planning, especially for a person with dependents. Having covered risk we shall now look at budgeting investments to meet our dreams of achieving our various financial goals with the ultimate one being achieving financial freedom.

There are various financial instruments available these days to achieve your financial goal. Your risk taking ability, income available for saving and age decides the speed at which you can achieve your goal.

Discipline not desires determines your destiny

One of the biggest differences between a successful investor and one who is not is the discipline in making investments. Discipline is doing what you know needs to be done, even though you don’t want to.

Either because of a sense of responsibility or the fear of social stigma, people are generally disciplined in providing for their monthly instalments which take care of their various liabilities. However, when it comes to regular investing they generally tend to break that discipline. This is seen in people who are running a tight budget and would succumb to indulgence rather than disciplined investment.

Insurance bundled with an investment product takes care of this indiscipline. Possibility of losing the premiums paid toward insurance indirectly forces one to follow a disciplined approach towards investment. This is a slightly expensive route than using term insurance policy and investing the surplus separately but the long term benefit, especially on account of disciplined and regular investment yields better results.

Other advantages

Disciplined and regular investment along with a risk cover is not the only advantage of insurance as an investment vehicle. Insurance products are designed by some of the best mathematical brains in the world. The products are structured in such a way that you can receive lumpsum payments in regular intervals after a threshold period. These payments can be designed to coincide with your financial goal. Similarly they can provide a steady stream of income post retirement. Or they can be done to meet your child’s need in case of some untoward incident.

One can argue that withdrawals from any other form of investment can be used to meet similar demands. But since most investments are in debt instruments part withdrawal will require either pre-closing the entire investment, which would result in a revenue loss.

Let us look at how life insurance compares with other traditional form of investments.

Life insurance as compared to Public Provident Funds:

In a life insurance policy the nominee gets the entire sum assured if the policy holder dies at any point of time. On the other hand in a public provident fund (PPF) the nominee will get the amount that has been deposited in his or her account. PPF norms are much more rigid and do not offer the flexibility of an insurance policy. PPF accounts are of fixed long term tenure while insurance offers a flexibility of short and long term. Further, insurance policy is considered to be more liquid on account of partial withdrawals and option for partial withdrawal.

Life insurance compared to fixed deposits:

Fixed deposits are of shorter durations as compared to life insurance and need to be renewed regularly. Compared to this an insurance policy can be held for a longer duration. Part withdrawals are generally not possible in fixed deposits which are not the case with insurance policies.

Life insurance compared to Mutual Funds:

The key difference between the two is the risk coverage element which an insurance policy brings in that is not covered by mutual funds. Insurance policies offer all the flexibilities of a mutual fund and give the policy holder the risk cover. Investment through insurance policy prevents second guessing on the part of the policy holder and prevents him from withdrawals or being the fund manager himself and stalling investment or shifting his investments at the wrong time and destroying his capital.

Insurance and country building

Adding a patriotic flavour to insurance, savings in insurance is considered to be long terms and is a preferred source of funds for long term projects like ports, hydel power projects or road projects as compared to other bank savings.

A big advantage that insurance brings to table is that it does the thinking on behalf of the policy holder. Most people, are either too busy with their lives or do not have the acumen to design a financial plan for their live. Insurance products bring in that element be it a children plan or a retirement benefit plan.  

At this point we would like to invite opinions from readers on various advantages and disadvatages of insurance as an investment tool.