So what is Insurance VS Investment? In our journey towards financial Independence, one of the most important things is Insurance. so, it should be a priority to get insurance before moving to the investment. Of course, the things which we have already learned in our previous articles are also very important because without having to record your expenses and an emergency fund you can’t have money to buy insurance. Now since we have already done that part, we could happily move to the most ignored topic in India which is Insurance.
According to a report on economic times, only 30% of the urban population have Term Insurance. Please keep in mind that this is only for the urban population and if we talk about rural areas this figure is very less. Another report by Edelweiss in 2018 mentions that only 3.3% of the Indian population have life insurance. These figures reflect that there is a lack of awareness in India about insurance.
Now, let’s discuss what insurance is and why you should buy any insurance on a priority basis.
INSURANCE
Insurance is an arrangement by which a company or the state undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium.
In simple language, we can say that insurance is a tool that reduces risk. We can easily understand it by wearing a helmet or seat belt. Suppose you are riding a two-wheeler then you know that it comes with a risk of meeting with an accident. Which could cause the loss of life. So, to reduce this risk we buy a helmet worth ₹1500-2000 and wear the helmet. If we ignore buying a helmet then meeting with an accident could cause a lot of money or a life which is invaluable. Therefore, Helmet reduces the risk. Similar is the case for seatbelts and airbags in cars.
Now, my question is would you drive the vehicle without protection? The simple answer would be no. Then why are we driving our life without any protection? It shows that we are lacking awareness. We should always be having two insurances – Term and Health at any point in time. We must not neglect the importance of these.
Since we have understood the role of insurance. We are ready to move on to the next thing which by not having proper knowledge and trusting our insurance agent we do the mistake. We mix insurance with investment. One thing to keep in mind is that both insurance and investment are two different types. We should never mix these two.
INVESTMENT
Investment is essentially an asset that is created with the intention of allowing money to grow.
In simple terms, an asset that increases the value of our money or increases our income is an investment. It means that we expect to grow our investments at a higher rate by taking some risks which we cover using insurance.
Now, let’s dig deep using numbers and mathematics. I know a broker who sent me a plan of a well-known company in India whose top plan was like – invest ₹ 500 daily for 16 years and get 1 crore on 25th year. Ah! That sounds very familiar and exciting, isn’t it? Most of our parents including us will buy this plan by dreaming of having 1 crore in the 25th year. But trust me these guys are just salesmen who care more about their benefits rather than ours. So, don’t get lured by such schemes.
We will take the same amount of money using two different cases.
Case 1
Suppose A person of 22 years of age takes term insurance for around cover of 60 years which means if anything goes wrong till the person is 82 years, his/her family will get ₹ 1 crore. This will cost him around ₹ 3,500 per month for 5 years only ( ₹ 2,10,000 Total). So he is reducing the risk of financial trouble to his family if by any chance he is dead till his 82nd birthday.
In the above plan mentioned by the broker, ₹ 500 per day will cost = ₹ 500*30 days = ₹ 15,000 per month
Suppose we don’t go by the plan and divide this money into two parts. With the first part, we buy the term insurance and the remaining amount ( ₹ 15,000 – ₹ 3,500 = ₹ 11,500) is invested in some mutual fund with 12% compounding.
For the first 5 years – ₹ 3,500*12*5 = ₹ 2,10,000 for a cover of 1 crore
For the same period (5 years) our SIP of ₹ 11,500 per month at a compound rate of 12% per month over 5 years = ₹ 9,48,593
Now, after 5 years we will stop paying the ₹ 3,500/pm for the insurance and the money will go in SIP. since we will have to pay for 16 years in the original plan, hence we are left with 16-5 = 11 years.
Again, SIP of ₹ 15,000 per month at a compound rate of 12% per month over 11 years = ₹ 41,19,222
Also, we will invest the lump sum amount left after 5 years at the same rate which will be = ₹ 32,99,728
After 16 years we are having = ₹ 41,19,222 + ₹ 32,99,728 = ₹ 74,18,950
Now invest again this amount for the remaining 9 years at the same rate = ₹ 2.06 crore
Thus, after 25 years you are having ₹ 2.06 crore and a cover of ₹ 1 crore. We have beaten the above plan by ₹ 2.06 crore which is a handsome return.
Case 2
Suppose We don’t purchase any term plan, which I will suggest you should always purchase. Then, we invest ₹ 15,000/pm for 16 years at 12% which will be = ₹ 87,20,673
Invest this amount for the remaining 9 years, then we will get = ₹ 2.42 crore
After 25 years, we have got ₹ 2.42 crore. Again we have beaten the original plan and also the returns are better than Case 1 but did you notice one thing that Case 1 is way better than Case 2.
That is why I suggest you just act on these facts and purchase a term and health insurance as soon as possible. Besides these two insurances(health and term) you don’t need any other. You can also play with these numbers and come up with a better strategy as discussed by me using a sip calculator or lump sum calculator and stop the original plan suggested by the broker or insurance agent. Act wisely. I will cover the importance of health insurance in another article. Till then share this article with your friends and family who don’t have insurance. May God bless us all to be financially free!
