Question

Some financial planners instruct their clients who are considering life insurance to 'Buy term insurance and invest the difference'. Specifically they are telling these clients to:

1. Buy term life insurance and then
2. Take the premium difference between whole life and term insurance and invest that difference.

How do you feel about that strategy?

Answer 1

Solution:-

Whenever we pay life insurance premium, a small portion of it goes towards the issue of life cover, and the remaining major portion goes towards financial investments on our behalf. Life covers gives us a specified sum in case of death and the investment portion gives us a lump sum amount on maturity based on returns generated on the investments made on our behalf.

If we really see it, the purpose of life insurance is to get cover and not make investments. There are more direct and sophisticated methods to invest our savings. We take life insurance for cover, and we can invest for future nonetheless through many other platforms. If we choose to take life cover only (through term insurance) from the insurance company and invest the remaining part of premium ourselves just like other investments we make, this strategy would have the following benefits:

• We can invest in mutual funds that are managed by investment companies and fund managers whose core competency is to invest money. The core competency of an insurance company is insurance and not investments. Hence, we give ourselves a chance of generating better returns if we invest directly through mutual funds rather than insurance service providers
• The sophistication of tools available for investments such as various asset classes, hedge funds, mutual funds, index funds, ETFs, etc offer far more variety and opportunity for investment process than a life insurance investment
• Greater opportunities for diversification in investments (based on our customised needs) as compared to investments through life insurance
• We still get the benefit of life cover and hence achieve the very objective of taking a life insurance
• Easier process of liquidation if we invest directly in mutual funds, shares, etc as compared to a n insurance policy

Therefore, its a good strategy to opt for term insurance from insurance company and invest the remaining funds directly.