Khota Paisa

Who Needs a 5% Return on Investment?

Posted in Insurance by khotapaisa on August 30, 2009

1. Recently IRDA made it mandatory to submit PAN details for insurance having more than 1 lacs premium. This happened after it was noticed that many people were buying insurance policies by paying huge amounts (guess it was crores) in premium (in cash).

2. I could never fully understand why would someone need an insurance policy (classic insurance) offering 4-5% return.

Combine the two and you get the answers. Who should buy classic insurance plan offering 4-5% return? Well, everyone who has bundles of money lying around unused. These insurance products offer (at least till now) a very good investment option (with no upper limit) which is mostly out of view of the banking system (and tax system). Add to this the tax exemption one gets on the maturity and the insurance, you get a perfect investment option.

But the problem is that most of these policies are bought by people who just don’t need it. People who earn hard money need to take the most out of money, instead they end up putting their money to idle at 4-5%.  The reason for this is mis-selling (as is in ULIPs) as well as low awareness. The best way to solve it is to remove the tax benefit on insurance premium partially. So, if you are paying a premium of 50,000/- and out of it 5,000/- goes toward mortality charges (i.e. towards pure protection), you should get tax exemption only for 5,000/-. This will also mean that only term insurance plans will get full tax exemption. Even otherwise, the common investor should be encouraged to buy insurance for protection not for saving.

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2 Responses

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  1. Basu said, on May 15, 2010 at 8:49 pm

    But when you are diversifying your investments into risky and non risky, at that time endowment plans are of advantage over the PPF and other avenues, in PPF return is less with that you will not get any risk cover. I am not telling that your cover is enough with buying these endowment products as compare to term insurance plans, these endowment plans cover less life risk. But advantage of some life risk with safer investment avenue is attached with these endowment plans.

    • khotapaisa said, on May 15, 2010 at 9:59 pm

      Well that why they say
      Rule 1. Investment is different than insurance.
      Rule 2. Rule 1 is always right.
      Rule 3. If you don’t agree, go to rule 1.
      So, if you need to cover life risk, buy term. Why loose on the return when you can buy PPF(8% return vs. <5% in endowment plans) with term and still score over endowment plans.
      But then, in the world of personal finance, everything is not about finance. A lot of it is about personal (comfort).


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