Difference between Investment and Insurance
- 13 Comment
This blog post explains the difference between Investment and Insurance. Most of the time people confuses both savings and the insurance. Some times without proper knowledge investing in the insurance will eat your money. Here you will see a simple example explains all that.
Insurance and Investments
Insurance is nothing but an agreement between the insurer (The Insurance Company) and the insured (You) to pay an amount as compensation if any unexpected event occurs. This amount may vary from a few hundred to even a few crores. The maximum amount the insured person can claim depends on the amount agreed upon as per the insurance policy.
A lot of us confuse Investment and Insurance. Investment is something that we save up to use while we are alive. Insurance is something we save up for our family to use once we are gone. The goals of Investment and Insurance are totally different. A lot of us take Insurance policies as investments. This is the reason why there are a whole group of people running behind us
telling us how great their new Insurance policies are.
Let me explain with a simple arithmetic. Assuming you pay an Insurance policy premium of Rs. 25,000/- for a policy that would mature in 20 years The Insurance agent would have told you that the policy is worth Rs. 5 lacs and you would get a bonus amount equivalent to it and hence you would be getting Rs. 10 lacs at the end of 20 years. This is a big amount and obviously most of us would be lured into taking this policy. What do we forget here?
1. A fat portion of the premium we pay in the first few years would be paid to the agent as a commission
2. Every year a portion of your premium (Atleast 2%) would be paid to the agent as a commission
3. The Insurance company would deduct a portion of our premium (Atleast 5%) as mortality charges.
4. The Insurance company can invest only in debt instruments and hence the returns on our investments cannot exceed 8 or 9 % per annum.
Assuming you invest the same Rs. 25,000/- every year in a bank Fixed deposit that earns an interest of 9% per annum, what do you think will be the maturity amount? You wont believe me. It is Rs. 13,62,745/- which is Rs. 3,62,745/- more than what your insurance policy would give you. (Assuming what your agent said was true and you would get Rs. 10 lacs)
You will be wondering how this amount of more than Rs. 3 lacs got reduced. The answer is simple: “COMMISSION”. Your Agent eats this amount from your investment and hence you are getting only 10 lacs.
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13 Comments on this post
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Aravinda said:
krishna, do you know an iota of info about Life Insurance field? Do you know the premiums applicable in different types of policies? You seem to be just repeating what a jealous guy told you about commissions of insurance agents. The commission given to an agent is NOT A PART of the given premium. Commission is not taken out of the premium n given out to the agent. It’s given from the company’s own funds.
Most importantly, as you at least seem to know, insurance is about financial protection, not to mint money. No bank will give your family 5 Lakh (as in your given ex.) if you die the very day you put your money in the bank. You’ll get what you had given – Rs 25000. But insurance company will give your family 5 lakh even though you would have paid only Rs 25000 premium. Did you care to inform your readers this? Do you yourself know this fact in the first place?
Talk only if you have correct n complete info about insurance than misguiding others too.
August 9th, 2009 at 12:44 pm -
krishnas said:
HI Arvinda,
Thank you for the comments. I would surely agree with your words but I am not mis guiding the readers. This article itself to understand the difference between Insurance and Investment. many people taking many insurance policies like how they are opening the bank accounts. For them only I wrote this article.
Thanks,
KrishnaAugust 12th, 2009 at 7:45 pm -
Sandip said:
Dear Krishna,
I absolutely agree with Arvinda that the above article by you is totally miss guiding to your readers. You have made baseless assumptions regarding commission and mortality charges. Also the example given by you has a lot of flaws. (I am not pointing out those b’coz I will have to tell some facts that wont precipitate to your brain and again you will pass on wrong info to the readers) Have you bought insurance for yourself? If yes …….why?
August 25th, 2009 at 4:03 am -
krishnas said:
Hello Sandip,
Thank you for the comments. I would agree that there may some flaws in the post. Can you please post here what is your thought on the topic?. I don’t want to mislead our readers. Every opinion from the reads I want to give respect.
Thanks,
KrishnaAugust 25th, 2009 at 7:42 am -
Aravinda said:
Hi Krishna,
Sorry for my harsh comments but your comment (“Your Agent eats this amount from your investment”) irked me. Being an insurance agent myself and an ethical one at that, I know how the insurance charges and commissions are applied.
In your own example, for an annual premium of Rs.25,000, an agent would typically get anywhere from Rs.5000 to Rs.7000 as 1st year commission. 2nd n 3rd year commissions, say at 5%, would add Rs.1250/yr. The next 17years can beget the agent, at the rate of 2%, Rs.500/yr. Add up; 5000+2500+8500= Rs.16,000. Lets push it up by another Rs.4000. Still, the figure is Rs.20,000 over a period of 20 yrs. But you said the agent “eats up” more than 3 Lakh!
I agree there are many money-minded agents who miss-sell policies. Such elements exist in all fields.
It’s good that you tried to tell the difference between insurance n investment but your article tends to make the unaware readers think negatively about insurance. Insurance is an instrument of financial protection. Comparing it with a bank deposit is wrong. The need of insurance must be understood by all those who provide financial protection to their dependents.
Thanks.
(9036460350)
September 16th, 2009 at 12:04 pm -
krishnas said:
Hello Aravinda,
Thank you for explaining the commission process involved in the insurance policies. I have never given the negative thought about insurance in this article. I want to make it clear that please don’t choose insurance for savings or investment. What I feel is that everyone must have insurance policy to protect their life and dependents. But, locking the huge amount on insurance is not advisable. I have read one of the trusted source about the commission process in the policy. That is why I have added in my article. If it is wrong then I will admit my mistake. Thank you for your comment.
Thanks,
KrishnaSeptember 16th, 2009 at 6:37 pm -
james kj said:
this is a very good information from mr krishna . because normally agents does not talk all the aspect to common people, their aim is primerily commission than the welfare of common men. i myself is a victim. because the agent told me insurance as an investment, thanks to krishna. james.
November 11th, 2009 at 1:50 pm -
krishnas said:
Hello James,
Without knowing we are doing lot of mistake like this. Financial planning is the common knowledge everyone should know properly. It will help individual and the country. I am updating this blog every day with good financial planning tips. You can subscribe to free email updates : http://www.thinkplaninvest.com/subscribe/
Thanks,
KrishnaNovember 11th, 2009 at 5:03 pm -
Aravinda said:
The need to make people understand clearly the concept of insurance, in general, and as a vehicle of insurance cum investment in the case of ULIP policies, in particular, can be seen in the case of James who has posted above calling himself a “victim” because his agent sold him a policy telling him that “insurance is an investment”. Though he has not mentioned the type of policy he bought, in the case of ULIP policies, it is indeed an investment as a predetermined amount of the premium is invested in equities by way of mutual funds, that too only in NIFTY scrips.
November 12th, 2009 at 2:47 am -
krishnas said:
Hello Aravinda,
Thank you for the valuable inputs. I know few agents who are explaining about each policy to the customer and spending their own time. I have own experience with one of my lic agent who really care about customers interest. Here we are talking about few agents who are misleading the customers to sell the policies. I can understand the purpose of the ULIP policy which gives the good return on the maturity. That also depends on the market condition. For that agents must explain the customers properly how things working in the market.
Thanks,
KrishnaNovember 12th, 2009 at 6:20 am -
Dj said:
Thnx to arvinda and krishna and also to others participant too making half truth to full exposer.
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