Life Insurance

Endowment plan, term plan, unit linked plan, guaranteed plans, what not?

I have been through every single one of them and made enough mistakes. This gives me all the rights to tell you what works and what doesn’t. The amount of money I have put in drain is mind blowing 😅Let me make a few things clear to you.

First things first, insurance is not about you. Insurance is about people around you when you are not around. When we get this concept right, we think about insurance differently.

Let’s look at what is insurance? Insurance is nothing but an entity undertakes to provide a guarantee of compensation for death in return for payment of a specified premium. The concept can be extended and you could pay a premium and insure many things like your death, your car, your home, your losses and more.

Insurance as a business works on your need to reduce the risk in life. As a species we are risk averse and we need a cushion to absorb that risk. The companies have misused this need and mixed it up with investments and made a big deal out of it. Given the low financial literary (including mine), our biases take over and we get greedy without understanding what we are getting into.

Here is a real deal (I don’t want to name the company). They said pay 2.2Lakhs every year for 16 years and at the end of 25 years you will get 1 crore if you are alive or your family when get 1 crore incase of your death in between. Sounds like an awesome proposition on the outset but if you do the necessary IRR calculations, you will see that 1 cr at the end of 25 years is at 5.9% which is less than your Fixed Deposits. This is how endowment plans fool you.

If you understand how investments work, pay 10K for term insurance and take the rest of 2.1 lakhs every year for 16 years and make it 2.2 crores at the end of 25 years. 10K is what you pay as premium and you will not get back anything if you are alive and kicking. A good deal right?

TL/DR, insurance is not investment. Don’t mix both. Treat insurance as insurance and investment as investment.

🥂to risk aversion!