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. If you have any thoughts please post it in the comments section. Subscribe to our future articles here.
What is Insurance?
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. The concept of insurance is brought into the market only because of the family protection in case if the only earning person died unexpectedly.
Read: What is Term Insurance?
But, because of the market competition and pressure on selling more number of units, companies started rolling out the insurance policies with the mix of other features which is naturally exist in any other investment products. Unfortunately in India, there is very less steps taken to educate the customers about the insurance and financial planning. It is our life, customers should be very careful on their family and future.
Difference between Insurance and Investment
A lot of confusion on the difference between 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?
- A fat portion of the premium we pay in the first few years would be paid to the agent as a commission
- Every year a portion of your premium (Atleast 2%) would be paid to the agent as a commission
- The Insurance company would deduct a portion of our premium (Atleast 5%) as mortality charges.
- 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.
Summary
I hope this article would have provided few basic ideas on the mistakes you are doing. Please take this article as first initiative to review your portfolio and see if there is enough term insurance is taken or market linked products. Share your thoughts in the comments section.
Subscribe to our future articles here.
August 9, 2009 at 12:44 pm
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 14, 2012 at 11:10 am
Aravinda, why are you so dumb with my name… krishns was right do not mix up insurance and investment .There are companies which will give life insurance for 5000 per annum upto a life cover of 15lks . So you can split the income 20K+5K… 5k for life insurance and 20k in fixed deposit
In this case if the insurer dies he ‘ll get the saved amount in fixed deposit and also the life insurance
August 14, 2012 at 11:46 am
First learn what you are writing about. You have all the right to remain a fool all your life but do not make it public by writing foolishly about matters, of which you don’t know the head or tail.
August 12, 2009 at 7:45 pm
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,
Krishna
August 25, 2009 at 4:03 am
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 25, 2009 at 7:42 am
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,
Krishna
September 16, 2009 at 12:04 pm
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 16, 2009 at 6:37 pm
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,
Krishna
November 11, 2009 at 1:50 pm
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 11, 2009 at 5:03 pm
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,
Krishna
November 12, 2009 at 2:47 am
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 12, 2009 at 6:20 am
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,
Krishna
July 15, 2010 at 5:49 pm
Thnx to arvinda and krishna and also to others participant too making half truth to full exposer.
September 21, 2010 at 3:39 am
very nice things and matter i have got from here to understand the insurance,investment and ulips.
February 17, 2011 at 12:29 pm
Hello Arvinda,
I am totally agree with you. Thanks for making thinks clear and so simple.
Thanks,
Amol
February 20, 2011 at 1:37 am
Hello Krishna,
Hope you are doing fine. The kind of discussion happened between you and Aravinda was really good one and will help readers in seeing both pros and cons of the Insurance. I may be wrong in bringing this point out but as far as i know the returns from a FD (in example mentioned above 3,62,745) would be taxable that will bring down the return value to certain extent. It would be great if you can suggest if this is correct or not.
Regards, Vivek Singh
June 21, 2011 at 8:51 am
Hi All….
It was a nice post to understand about the concept of insurance and investment.
June 21, 2011 at 7:35 pm
Hi Shailendra,
Thank you for the comments.
- krishna
July 3, 2011 at 4:40 am
Hi Krishna,
A good post indeed to give insight to the common man who thinks of investment rather than insuring himself for his family. I also did this mistake few years back and owes few policies, as the Agent was not giving me a clear idea about the same. Now I had realised that for the sake of pure insurance one has to choose ‘term insurance’ and for investment we have plenty. Ofcourse insurance policies having returns upon maturity is also one among them.
I appreciate your gesture for accepting some flaws in the post pointed out by Aravinda.Anyways your interaction with him over the comments were pretty useful for all.
July 8, 2011 at 12:02 am
Thanks Krishna for your valuable information ,this discussion is very help ful for common man and investment companies maynot explain these things right?
could you please tell me one thing we can invest directly to the investment company without any agent ?
July 8, 2011 at 12:43 am
@Kishore : I guess ‘Aegon Religare’ does it by way of doing online without any agent for insurance investement..Hope few others also do..
July 8, 2011 at 1:39 am
Hello Kishore.GP,
If you want to invest in the Insurance product, you have go through an agent. As Ashok said, online prodcut you can do without an agent.
Thanks,
Krishna
July 8, 2011 at 2:13 am
is it possible to invest non insurance products without agent?
Thnx
Kishore.gp
July 8, 2011 at 2:18 am
Hello Kishore.GP,
It depends on the product. For example if you are investing in the mutual funds, you will normally go through brokers like ICICI,ShareKhan,etc. to buy the units.
Most of the non-insurance products don’t need any agent.
Thanks,
Krishna
July 8, 2011 at 2:50 am
Hi Krishna
Please add one discussion for child education plan invesments I am Eagerlywaiting for that.
Thnx
Kishore.gp
July 8, 2011 at 3:18 am
Hello Kishore.GP,
Sure. I will soon come up with articles on that topic.
——-
Have you done IT returns. You can do it online from here:
http://www.taxmunshi.com/partner/tpi
Thanks,
Krishna
July 9, 2011 at 1:16 am
Hi all
I planing to take LIC policy directly from LIC branch without any agent , 2 days back I got call and he told me we are from direct LIC , but still I am unable to believe could you please tell me how to confirm ?
please help me friends.
Thanx
Kishore.gp
7667617454
July 25, 2011 at 2:17 am
I would like to inform you that… more than 45% cases of insurance company are always pending… they took money quickly but at the time of returning.. they talk about number of documents and after that they keep on saying that it is under process… without RTI complaints they never listen to us..
Its my personal experience.. that’s why I hate insurance and always prefer banking.. that’s it.. all the best to all of you for your investments..!!
August 3, 2011 at 10:56 pm
Hi,
According to me,the comments you sharing here is not fully correct or fully wrong about Insurances and investments.
Insurances is not like a small part to explain like this ways and Investments have more biger part to explain.
But anyway,I am appreciating arvinda and krishna both of you for attempting to give some knowledge regarding this topic.
Thanks
Pranabesh
August 22, 2011 at 7:03 am
Hi all,
I thank those who found my posts helpful.
I’d like to briefly tell about investment Vs insurance for those who are thinking about taking an insurance policy.
As I’ve written earlier, it’s wrong to compare an investment product like Fixed Deposit with life insurance. For that matter, it’s wrong to compare insurance with other investment avenues like realty or equities or gold/jewelery. Because none of these investment options provide you life coverage. In the case of FDs you would know the maturity amount that you’ll get at the end of the tenure. Both the capital and the interest, as fixed by the banks, are safe and assured. Realty/equity/gold- these have a good chances of appreciation over a long period of time but they come with no assurance of capital or appreciation.
On the other hand, an insurance policy ‘insures’ the dependents of a person (parents/siblings/spouse/children etc) from the financial hardship that they may have to bear with in the unfortunate event of that person’s accidental, unexpected death. An insurance policy certainly can’t make up for the physical and emotional loss caused by a person’s death to his family. But, it can surely help them in coping with the financial expenses (living costs/education/marriage/loans etc), even in the absence of the earning member of the family.
Do NOT buy an insurance policy-
* if you are 100% sure that you will lead a healthy working life up to the age of about 55-60 yrs. ( Please note, every year, around the world, approx. 5 Crore people die due to various reasons. And close to 1.5 Lakh die every day.)
or
* if you already possess assets (excluding loaned assets), movable or immovable, including inherited/inheritable asset, worth at least 10 times your annual gross income. For Ex. if your annual income is Rs.5 Lakhs, you should be having assets worth about Rs.50 Lakhs. I’ll tell you the logic behind this later.
or
* if your spouse is also earning well AND you’re sure that she is guaranteed to survive to celebrate her 60th birth day!
or
* if you firmly and foolishly believe the divine forces of the world will take care of the financial needs of your family!
Alright, if you don’t enjoy the above mentioned advantages, then please think how much insurance coverage you need to buy to protect the financial well-being of your family.
The thumb-rule is 10-times your annual gross income. Why 10? Let me explain the logic behind this. Assume my annual income is Rs.5 Lakhs and I have taken a policy that gives me a coverage of Rs.50 Lakhs (5 Lakhs x 10 = 50 Lakhs). Now, if I’m to meet my unexpected death any of these days, my family will lose the bread winner. They stand to suffer and lose the living/life-style which I could afford for them with my income. But luckily I had taken a policy for Rs.50 Lakhs coverage, so they will get Rs.50 Lakhs. Now, they can keep it as an FD in a bank and get, say at an interest rate of 10% p.a, Rs.5 Lakhs as interest – the amount I was providing them earlier. This is just a thumb rule. You can vary the amount as you deem fit according to your individual situation and other factors.
But, as someone has posted above, please do not “hate insurance”. It’s just as sensible as hating to see your near n dear ones financially secure!
I’d like to tell about investment+insurance product i.e ULIPs later.
Please feel free to ask if you have any questions or doubts.
Or you can contact me at: justaravinda@yahoo.com
August 23, 2011 at 5:59 am
Hi Aravinda,
I like the way of your presentation and I have an option to add with it to show it more accurate.
My way of calculation of insurance coverage to be liked
= (65yrs-Present Age)*(12*average Monthly expenses).
And one more things to be highlighted that average FD’s interest rate should be nearly about 8% not 10%.
But apart from this,your view is very much acceptable.
Thanks,
Pranabesh P
August 24, 2011 at 12:12 am
Thanks Pranabesh,
Your formula is good too. I used the working age range of 55-60 as an average, though your 65 yrs working-life would be most safe. Funny thing is I’ve heard many of my friends comment, some in IT field, that, given their present working hours, they would rather retire by 40-45! (LoL)
I took 10% as interest rate for the simplicity of calculation. But then I remember banks were giving, back in ’96′-’97, about 16-17% interest p.a on FDs. Golden age, perhaps !!!
And I’ve used some unsavory cases for NOT buying insurance because a lot of people are so sure of life that they ignore the need of insurance, risking putting their family in avoidable misery.
August 24, 2011 at 12:23 am
Also to be noted, I’ve not mentioned which type of policy/policies to go for in availing the requisite total coverage. Because the premium and the benefits, for a certain Sum-Assured, varies hugely from a Term policy to an endowment policy. That would have elongated my post further. Anyway, I’ll try to explain those differences later for those interested.
August 24, 2011 at 2:33 am
Aravinda,
Can you please tell me a bank or financial institution’s name which was given 16-17% interest p.a on FDs in between 96-97 ????
Now I have to advice you that not to give us illustrative or may be figure.It would be very nice if you have a true figure what you have portrait of….
Thanx
Pranabesh P
August 24, 2011 at 4:39 am
@ Pranabesh
I wish I had kept those deposit certificates for 15yrs more !
Well, I can only tell out of the best of my memory.
1. My father had deposited a good deal of money in Shri Ram Chits and I remember he was getting about 18% p.a interest.
2. During the same period, my father had lent money to a relative for 16% interest n I asked him why didn’t he deposit with Shri Ram Chits, which gave better return. He replied that our relative would have paid 16% interest on bank loan. So out of goodwill he had done so.
Probably banks weren’t giving 16% interest on FDs. But since Shri Ram Chits is a private player they were giving higher than banks.
So, except for this I don’t really have any solid proofs to show that a person could earn 16% interest during ’96-’97.
Anyway, this link may help prove that the figure I quoted was quite plausible (though I’m sure about my quoted figures).
http://www.caclubindia.com/news/deregulation-of-savings-bank-deposit-interest-rate-a-discussion-paper-9158.asp
In the above link, Table 11, bank interest rates on term deposits during various years, shows interest given by banks during ’96-’97 as 13%.
That’s the best I have to support my words.
October 16, 2011 at 12:17 am
krishna, you have misguided already misguided people of our country where insurance is going to be a bare necessity today and tommorrow. what enlightenment you have tried to throw is absolutely Rubbish. You are requested to please rectify or remove this blog for mankind. and please get properly updated and trained in all this. Hope you would understand seriously. thanks
October 17, 2011 at 4:24 pm
Hello vipin,
I am not understanding what I have misguided in this article?
Please explain me how it will provide the wrong information to the readers?
Thanks,
Krishna
October 22, 2011 at 2:23 am
Krishna, i think you are doing great work. one thing that we have to understand that insurance itself is like expenses.It cannot be investment in terms of returns.If one combines the two then returns will be less for sure
November 12, 2011 at 3:32 am
Insurance is a risk transfer mechanism. It covers pure risks that an individual or organisation faces. Cost of risk retention (not Insuring and keeping the Risk) is higher than cost of Risk Transfer (Insurance) as Insurance companies are able to better manage Risks by pooling non correlated or negatively correlated risks. An Individual cannot ever do this.
Asset Liability matching concepts require Insurance companies to invest part of the premium in investment products (where gains are speculative) in case the product that you buy has a Financial Investment component. However it is possible to buy Term Insurance where the premium is invested in secure and non speculative investment options by the Insurer.
So if you want to just Invest your money buy Investment products. However if you wish to cover your life/property risks and/or also watch your money grow buy Insurance products. Since Risk Appetite is different in different individuals / firms which is better (Insurance or Pure Investment Products or a Mix of two) is a matter of how well you are able to assess your needs.
Regards
November 12, 2011 at 5:04 pm
good clarification.
December 11, 2011 at 11:57 am
Dear Krishna,
You have written an amazing article and I fully support your view.
Please ignore the stupid comments made by the frustated insurance agents. They are getting agitated as the awareness will throw them out of business.
For all you insurance agents, who are attacking krishna, I have a very interesting links for you, which might clear all the doubts in your minds.
http://professorbajaj.wordpress.com/2010/04/29/my-advice-to-the-%E2%80%9Cinvestment-advisors%E2%80%9D/
http://professorbajaj.wordpress.com/2010/07/02/why-is-insurance-mis-sold-in-india/
Regards
December 27, 2011 at 6:36 am
Hello Saurabh Bajaj,
Thank you for the comments.
-krishna
January 4, 2012 at 5:41 am
It’s a nice article krishnaji,
No one can buy Insurance without Agent
But other Investment Product buy directly & that product commission structure is very low below 1% & everybody know Insurance commission structure .
January 13, 2012 at 6:19 am
I would like to know Positive/Negative side about the “Max New York Life Insurance’s LIFE GAIN PLUS-UIN 104N014V01″, which I adopted just by today and not seen the Certificate and T&C as it is far away (Goaltore-West Bengal- India) from my current residence (Oman-Muscat), The plan is for 20 yrs. (6yrs premium to be paid @ Rs.60000.00 per year. The return table also please let me know if it is there with anybody. The axis bank/max representative not provided me that table as they told it will be with the certificate. Please reply at the earliest as still there is a chance “free look period”. Waiting for best suggestion.
January 13, 2012 at 6:41 am
Dear Laxmikant,
Its a ULIP that you are holding. Since u still have the free look period with you, just take your money out of it. The axis and max guys have just managed to fool you but you have the chance to come out of it.
For more details on hazards of ULIPs, you may visit http://professorbajaj.wordpress.com/2010/10/05/new-ulips-are-they-any-better/
and
http://professorbajaj.wordpress.com/2010/03/05/look-before-ulip/
Regards
March 4, 2012 at 11:31 am
I Partial agree with a things that Investment and isurance are different.
But as I read article for seck of 3 lakhs after 20 year you are missing a your won life risk.
I think owner can go with a term insurance amount for every year to make life safe and then go for fix deposit other wise your family not get sufficient fund to survive.
I have insurance of 50Lakh..25 LIC + 25 Sun Birla…now I am doing just now investment with Mutual funds , Stock, National Bonds, etc..
But I still like to say that then insurance I holding that is also my investment. and I am still preferring a LIC few investment funds like Jeevan Vridhdhi and Jeevan Saral as investment.
I am no bothering about the commission as agent is providing me a service when there is claim or help and further investmnet analysis requrie. If you have a sufficient time to do everythign by own you can try to contact every head offices direct and remove the agent ,but I am sure you have to take support of them
Thanks
March 5, 2012 at 8:08 am
Hello Chetan,
Thank you for the comments.
It is not against the agents. But, to help the readers understand the scenario. Because of this article, if any one reader realizes the fact, that’s good enough for the purpose.
Thanks,
Krishna
May 19, 2012 at 10:49 am
Krishna ji ,
It’s nice article. People(Agent) not understand what you are saying
Insurance is risk cover product & Investment is making money.
Agent view is only commission. I see many investor with 10-15 policy.
Every year agent came and sell one policy for their target.
here is link good article about Why is insurance mis-sold in india?
http://professorbajaj.wordpress.com/2010/07/02/why-is-insurance-mis-sold-in-india/
July 24, 2012 at 6:23 pm
Hello Puneinvest,
Thank you for reading my blog.
Thanks,
Krishna
October 3, 2012 at 4:03 pm
Thanks for advice
October 4, 2012 at 6:37 am
Thank you for reading my blog.
Thanks,
Krishna
October 11, 2012 at 12:54 pm
I have seen your blog here, It is nice to meet you! I will keep watching it in future.
October 17, 2012 at 10:51 am
awesome post
October 17, 2012 at 5:52 pm
great information,thanks for share krishnas