Traditionally insurance has been viewed as an investment alternative alongwith other forms of investments like equity, debt, real estate, jewellery and the like. Some of the attractions to invest in insurance used to be tax benefits, low outflow of cash, safety as well as risk coverage.
We Indians hate to talk about risks - it is not in our nature to do so and is considered inauspicious to do so. But with falling returns on various investments, the time is ripe to consider insurance purely from the angle of covering up risks.
These days, a risk free rate of return is a mere 6.5% (tax free) - can insurance products give you a higher return than this? Certainly not!
There is a paradigm shift involved in buying insurance policies - it has to be viewed strictly from the angle of providing a cover against any eventuality that may arise in the future.
An example here would be an eye opener. Let us consider a male who is 30 yrs old and a 20 yr horizon.
A money back policy of LIC for a sum assured of Rs 1.0 Lakh would entail an annual premium of Rs 6279 per annum and if one wants to have a cover of Rs 10 lakhs then the premium payable is a hefty Rs 62, 796 per annum.
Now consider a pure term insurance plan with a sum assured of Rs 10 lakhs. The premium payable is just Rs 2813 per annum!! Of course this is a no frills risk coverage policy and there is no return at the end of the term. But then you have almost Rs 60, 000 per annum to invest it the way you want to while being insured all the time.
The recommended way to go about it is :
> Decide on the risk coverage you want. For example if you think that in your absence your family would need Rs 1 lakh per annum, then you should leave behind a fixed deposit of Rs 20 lakhs. This FD would yield a post tax interest of Rs 1 lakh per annum at today’s interest rate!!
> Go in for a pure term insurance policy to maximize the risk cover.
> With the remaining money you can go in for other policies as per your needs or other forms of investment according to your risk appetite.
By the way, taking a term policy is a good way of insuring high value loans e.g. housing loans.