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
A lot of us confuse Investment and Insurance.
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.
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
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.
