In this article I’m writing about a controversial topic, Mutual funds vs ULIPS. People have always believed life insurance as a secure form of investment. That is true until few years in the past. In the recent decade with rising inflation and falling interest rates, the returns offered by life insurance are not protecting our investment. Also, there is ULIP which is a mix of life insurance and market linked investment. My take on Life Insurance is it a bad investment choice in current scenario.

I have experienced it after taking a policy and paying the premium for 6 years.

The only source of information when you start earning money is your parents and neighbors. My Dad told me to save and there is one other neighbour’s life insurance agent who had advised to take an insurance policy.

I had completely NO idea at that time about anything related to money. So i went with the flow. Took that policy as he is known to us and also believed in LIC.

It is been 12 years since i made that investment mistake and still i see many doing “Life Insurance as an Investment”.

So is it really that bad? You will see answers to your questions in this blog.

Should I buy Life Insurance as an Investment ?

Life Insurance is risk protection tool. If you are not there, in your absence this amount can support your family and dependents.

Below is my take on why life insurance plus investment returns are offered,

1) To make the product attractive

2) People buy when returns are associated with it

It was earlier started to protect sailors as they travel a lot in uncertain conditions. It became a huge industry as the scope of Life Insurance was broadened. Also life is uncertain and death can come to anyone at any point of time.

Then Why so many life insurance products with returns are offered ?

Generally any product combined with people who desire for it becomes easy to sell. Have you heard these words “ Life insurance with assured returns”, “ Life insurance for finance goals”, “Best tax saving product”, “One time premium with tax free income”, “life insurance investment policies”

One more reason is that in the last 30 years the average returns were near double digits. Also earlier the choice was limited with no better alternatives.

Mutual Funds vs ULIPS – What is an ULIP

First let’s understand about ULIP policies. As per IRDAI, returns has to be projected or shown only at 4% and 8%. In case of traditional products it has been sold as assured returns.

In case of ULIP policies, some of the fund returns are linked with stock market. When the market performs well, automatically these funds perform well.

Also new policies will be launched which will show only good returns in the last 2-3 years.

Now it is easy to show returns in double digits. Also it is easy to sell it to you. Just ask these questions with the person who is selling it to you,

1. Will these returns last till the policy ending term – If he/she says Yes, then they are not clear with  fund performance
2. Why this instead of Term Insurance – If he/she says that you get returns in this policy whereas term insurance doesn’t provide returns, then again they are following the template to sell the policy without clarity.

Do you think this return is sufficient ?

Inflation in the last few years is less than 5%. Medical inflation has been averaging around 14%. Educational inflation is in double digit.

You also need to include something called Lifestyle inflation. Money you spend on weekends, movies, impulse buyings, Travels, lifestyle products at home, gadgets etc.

Lifestyle inflation has entered many home and it is difficult to measure. Reason being you never know when the next expense is going to come in your life.

What is your future needs ?

Most of you would have bought insurance just because of Tax savings. The first step or the way you would have come across buying an Insurance as an investment.

Another important reason some of you would have taken is “Risk protection with Returns”.

You also need to know that Insurance as an investment component product cannot provide even one of this.

What is an ULIP

Generally Insurance is offered as one-time premium payment product which might have timeline of 7 years or 10 years. There are ULIP policies which has been sold like 5 years premium payment policies. You need to pay premium for the entire term like 10 or 15 year which has been mentioned in the policy. Please don’t go with the words of these agents. They sell saying that you need to pay only for 5 years and stop. Reason is that lock in period for ULIP is 5 years and you can stop paying the premium. You can either redeem after this time or wait till maturity.

Life Insurance with high returns are highly impossible.

Returns from ULIP

Secondly let’s understand about mutual funds now. Any investment tied up with financial goals helps in tracking effectively. First whether this investment will help in achieving your financial goal. Second you won’t break that investment.

Most of the long term financial goals are,

1. Kids education
2. Kids Marriage
3. Retirement
4. Tax saving

Tax saving is another reason people say if they don’t think any other goals immediately. So i have included that as one of the long term financial goals.

Analysing the inflation chart for the last 29 years says that the average inflation in India is 7.7%.

What this means is that your investment returns needs to be better than this inflation rate. It is just to make sure you have beaten inflation.

Adding Lifestyle inflation, the total inflation will be a minimum of 10%.

Now, the average returns from these traditional product is around 5.5-6%.

Remember that as per IRDAI, they can show returns only between 4% – 8%. So if they are able to provide anywhere between the illustration returns, they are providing as per the regulations. Also this is safer without any risk.

So just think if this 6% return will be able to beat combined inflation force of 10% in your life.

You might ask me, why this returns matter ?

In short term you can think about capital protection. Short term can be 3-5 years.

Any long term goals or investment needs to beat inflation and yield better returns.

You also need to understand the effect of combined inflation in your life. Inflation doubles the price of product once in 7 years.

This means that average monthly expense is going to double every 7-8 years.

Kids Education requirement:

Let us see with one example of kids education.

In 2020, average cost of higher education is 10 lakhs. I’m not considering IIT or any big institutions as those cost will be already way high.

In next 18 years by 2038, this is going to be around 40 lakhs.

You can do this calculation by yourself with Future Value calculation in Google.

FV = (Interest, Period,Pmt, Present Value, 0)

Considering 10 Lakhs as Average education cost,

then in 18 years it might be

FV = 39,96,019 ( @ 8% inflation )

Let us consider Investing 50,000 per year for 18 years.

Highest return considered as 8% for traditional products,

though all the funds have returned only 5-6%

@ 8% returns this is going to give you 16,72,711

@ 6% returns this is going to give you 14,02,566

Suppose if you want to get 40 lakhs as per Education inflation you need to invest 1.4 lakhs per year.

Verify insurance21.in for LIC policy returns calculation.

The Big question you need to ask yourself is that,

Is this returns satisfying in long term ?

Now let us consider the protection part.

Even if you start paying 1.4 lakhs per month for 40 lakhs coverage, will that be sufficient.

As that is for your child education.

You need to consider monthly family expenses, for paying loan EMI’s etc. Even on protection front, these kind of policies will not be able to cover.

Life Insurance with maturity cannot provide the high returns.

Sad truth, none of the agent will be saying this.

How much Insurance you should take ?

Generally Insurance should be taken covering monthly expense for at least 10 years (minimum), child education, any pending loans etc.

Insurance cover = Monthly expense for next 10 years + Child education + Pending Loans + Dependent needs

Are you given a choice to take like this ?

Most of the time Insurance as an investment is taken for below points,

1) For March end tax saving purpose in section 80 C

2) Based on how much you can pay in that year

If you are taking based on how much you can pay, for sure you will be under insured.

If you want increased cover, the only option available with these traditional policy is Increasing the premium which will affect other financial goals.

Best thing to do is to take Term insurance with full coverage. Generally based on your monthly or annual income 10x coverage is provided. Your yearly premium will be one-tenth of the traditional policy.

Remaining amount you can use it for Investing wisely in products which can increase your returns. Like mutual funds and Stock Market.

4 Points for better insurance coverage :

• Consider your dependents, Loans – Arrive Risk coverage amount needed
• Consider your financial goals  & amount  required to achieve these goals using FV calculator in google sheets
• Term Insurance for complete coverage
• Invest wisely in long term products like  stocks, Mutual funds

Mutual Funds vs ULIPS – What are the Mutual funds

Mutual funds are categorised as Equities, Balanced and Debt funds. The type of investment in each of the categories vary and hence the risk term associated will also vary across. Different types of mutual funds caters to different set of people. You may be aggressive, moderate or conservative when it comes to taking risk. Invest in each of the category to balance the risk. Know the difference in each one of them.

Equity Mutual funds suits an aggressive investor and provides greater returns among the available categories. Advantage of investing in equity mutual fund is they can provide returns between 12 – 15%.

To read my other articles on mutual funds.

To learn Course on Mutual funds