By Karim Lakhani - CFP CM
Chief Financial Planner & Managing Partner
3rd EYE Financial Planners LLP
It is seen
many investors get confused between Insurance Products & Investments
Instruments. For a common man the question is always the same, “Should I invest
in Insurance Policies or other Investment Instruments?”
To answer
this let us first understand the concept & relevance/ importance of
Insurance & Investment in our life.
In One words
“Protection” is the most appropriate word to describe Insurance. It gives one
Financial Security. Insurance helps in recovering losses from such events that
are fortuitous or uncertain.
Wherein
“Growth” is the most appropriate word to describe Investments. It helps one
accumulate wealth over a period of time through long term systematic approach.
In our life
we always look for Security. Understanding the significance of Security in our
life in essential. For different people security means different. For some
Security means Living in own house, for some Security means living with Family,
for some Security means having more physical assets, for some Security means
having regular source of income, etc. But in real sense security means
availability of adequate amount of money when required.
Insurance
& Investment both makes money available at some point in time. With this
statement both of their purpose looks the same, but in reality both of them are
different as they are used at different point in time in our lives.
There are
two important phases in our life viz Present & Future. One has to secure
both the phases in his/her life. The word “Present” refers to any such event
occurring today arising money requirement like Health Emergency, Unemployment,
Disability, etc... The word “Future” refers to all the future money requirement
towards Goals fulfilment (Short term, Midterm & Long term). When we have to
secure our Present Financial Life it can be done only through Insurance &
for Future Financial Life it can be done only through Investment.
For health
emergencies Health Insurance (Mediclaim, Critical Illness, etc) policies will
suffice. For interruption in income due to Disability, Personal Accident &
Disability Insurance helps. For untimely death Life Insurance has to be taken.
For
fulfilment of Goals Investment is required. Unless you invest you won’t be able
to accumulate wealth for your future goals. For investment purpose one should
not think of Insurance as Insurance is for protection & not accumulation.
There are many such insurance plans which gives you benefit of both i.e.
Insurance & Investment but they may not be the best option available in the
market as such plans comes with higher expenses ratios resulting in less wealth
accumulation over a period of time. Although if you compare the returns
generated by the funds of Insurance products with non insurance products, they
might be identical, but the impact in the hands of investor varies a lot due to
variation in the chares, Insurance charges being at a higher side compare to
most of other only investment instruments.
Both these
products are specialist in their nature. To understand it much better let us
take an example of restaurants.... If you like to eat Chinese food which
restaurant would you prefer? A Chinese restaurant or a Multi cuisine
restaurant? Certainly a Chinese Restaurant as they are Specialist. A Multi
cuisine restaurant also offers Chinese dishes but the taste may not match with
a Specialized Chinese restaurants.
To conclude, when you are comparing Insurance Policies with
non Insurance Investment instruments, it would not be right to say one is
better than other. Both are good & appropriate at their level. Only thing
is we need to understand what to use when. When you are looking for protection
against any uncertain or unfortunate event there is nothing better than
Insurance, no investment instrument can give you such protection. Where in when
you are looking to plan your future by accumulating wealth it is only non
Insurance Investment instruments will suit the best. No Insurance policies can
give you such growth & good returns. A persons portfolio should have both
as they complement each other than competing.
