Insurance

While doing financial planning we always talk about taking an insurance policy. Usually financial advisors would ask you to take the types of policies

1) Life
2) Health
3) Home

I am not talking about car, is because the law forces you to have one anyway.

Now let’s look at Life. The insurance agents usually will show you a range of policies, from wholelife, moneyback, etc. and they talk of riders, to take care of health, accident, etc. But what is best for you? First let us try and understand what is life insurance? Life Insurance is usually to take care of your loved ones incase something happened to you. So it would be best to take a policy, which would take care of the financial needs of you and your family in case something happens to you. You should not look at insurance as an investment.

Before we go into anything lets see how insurance works. Insurance does not protect you against something happening to you, it covers the consequence of an event. So if that is the case, why should we look at is an investment to get something in return. You should buy an insurance hoping the event does not happen, but if does happen. The reason for which you have taken the insurance will be taken care of. The premium you pay, is an expense to buy Peace of mind.

Basically what happens when you buy an insurance policy with a return of money? The insurance company breaks up the premium into 2 parts. One risk premium and another investment. The risk premium goes as expense to buy you peace of mind. Then investment premium is invested and what you get is return of your investment premium. So why should you ask an insurance company to do investment for you?

The core competency of an insurance company is not investment. You have scores of investment companies. Also check the historical returns of the same amount of investments with an insurance company vis-à-vis an investment company. The returns you get from an insurance company have always been less. So the best thing to do is go in for term insurance only.
Term insurance provides insurance for a specific period of time, or “term”. Term insurance provides only “pure” insurance protection and does not have the savings or investment feature. This type of insurance offers the users a choice of terms from 1 year renewable up to 30 year terms. The premium for the term remains the same throughout the term; the most popular nowadays is the 20 year term. In certain cases you can also opt for a term to a specified age, usually 65.