Investments | Ranjan Varma's Blog

This is further to my post on Insurance v/s Investments

A friend pointed me to this question posed at BimaWorld: Should one mix up insurance with investment? why yes and why no”. If I have INR 1,00,000 per year for investment, insurance and other savings how should I balance my investment and insurance.

Insurance and Investments are two different things. Insurance depends on your economic value to your family. Investments depend on your surplus income and your financial goals. So, to my mind, mixing up the two is misleading.

But in India, this mix up is common place. So even though the question asked may be misleading, it really begs for an answer!

So if I have Rs 100000/- with me, I would first figure out the amount of cover that I require. I will take my annual income, multiply it with 8*, add liabilities and reduce assets to arrive at the figure.

Let’s take an example: Annual Income: Rs 5 lacs, Assets: Rs 10 lacs, Liabilities:Rs 5 lacs. So my approximate cover would be 5*8+5-10 = Rs 35 lacs.

*There are a lot of variations in calculation of the insurance cover by the Insurance companies. Multiplying the annual income is the most debated one. I use 8 years because I feel that this is enough for my family to start generating income on their own after a gap of 8 years.

Some Insurance Companies recommend multiplying the annual income by 18-20 times! There would be a real hazard of doing away with the spouse!!

Now for an Insurance cover of Rs 35 lacs, there would be a range of products that could cost you from approx. Rs 10-15000/- to over Rs 1 lac.

I would recommend taking a term insurance cover for Rs 35 lacs paying a term premium of Rs 10-15000/- and invest the balance in low cost Mutual Funds/ETFs.

But I would also recommend checking out your risk profile and learning the relevant asset allocation rules before you go on to invest your money.

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The Simple Dollar reviews The Total Money Makeover and even though these are US figures it applies much the same to India. Here’s an excerpt (a point I keep harping upon):

All of the [extra payments beyond the price of term insurance] per month disappears in commissions and expenses for the first three years;

after that, the return will average 2.6 percent per year for Whole Life, 4.2 percent for Universal Life, and 7.4 percent for the new-and-improved Variable Life policy that includes mutual funds.

These statistics are from Consumer Reports, Consumer Federation of America, Kiplinger’s Personal Finance, and Fortune magazine, so these are the real numbers.

Additionally, a recent article in National Underwriter, The Industry Mouthpiece, showed charts of returns from fourteen national companies. The returns they show average only 6.29 percent over twenty years. [...] Worse yet, with Whole Life and Universal Life, the savings you finally build up after being ripped off for years don’t go to your family upon your death; the only benefit paid to your family is the face value of a policy [...].

The truth is that you would be better off to get the [inexpensive] term policy and put the [extra payments beyond the price of term insurance] in a cookie jar!

That pretty much sums it up. If you want insurance, buy bread-and-butter term life insurance. If you want an investment, buy an investment from a brokerage with low-cost investments . Mix the two and you’ll find yourself eaten alive by fees and commissions.

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