Insurance & Investment - A toxic relationship!
September 04, 2021
6 min read
The backstory
My bank’s relationship manager ( pretty aptly named designation, isn’t it ? ) reached out to me with a Smart Wealth Plan proposal. On the surface it seemed to be a fantastic investment opportunity. So, I was curious to calculate the returns on it. And the results, I say, were shocking!
Here is the benefit illustration for the plan below. I will let you assess what’s wrong with it.
What’s wrong ?
Everything!
Yes, everything. The sheer existence of such investment plans in the market baffles me. For years people have been fooled by numerous companies with a toxic cocktail of insurance and investment.
To find what’s wrong, let’s first understand what do both these words exactly mean ( both taken from Oxford English Dictionary ).
Insurance is something you do to protect yourself against something bad happening in the future.
Investment is the act of giving time or effort to a particular task in order to make it successful.
Do you see any similarity at all between both of them ?
People work hard, very hard to earn money, yet, they give absolutely no thought, whatsoever, when handing down their hard earned money to these companies. This is the psychology of every human being. We all have expectations. When someone guarantees to fulfil that expectation, we pour everything into them or their scheme in this case.
Let’s consider the Smart Wealth Plan. It looks extremely innocent. You pay ₹ 1,00,000 each year for 10 years, excluding GST. Not only you get back your money at the end of 36th year, you also get a guaranteed income of ₹ 96,210 every year for 25 years. So, in total, you get ₹ 34,05,250 including your part of the capital. Not only that, you also get a death benefit of ₹ 11,00,000 for first few years which increases to ₹ 16,89,700 by the end of 11th year, where it actually ends.
Here is what’s wrong:
- You are locked in for 36 years. You have ZERO access to your money. Yes, the money that you earned with your hard work. Any time you surrender, you will lose money, guaranteed! Everything in this plan is guaranteed.
- You earn an interest of mere 6.12% annually (GST paid is part of this calculation). You will never beat inflation. Never !
- Considering the fact that this is also advertised as an insurance product, death benefit ends 1 year after premiums dry up. By the time you are offered a death benefit of ₹ 16,89,700, you have already paid ₹ 10,00,000 off that amount. Not considering the interest amount, company will only be paying around ₹ 6,89,700 out of it’s pocket.
What if ?
What if you had invested the same amount of money in an index fund ? With an expected rate of interest of 12%, you would have ₹ 19,65,458 by the end of 10th year.
| Parameters | Values |
|---|---|
| Annual Interest Rate | 12% |
| Number of Premiums | 10 |
| Amount of Premium | ₹100,000.00 |
| Present Value | 0 |
| When Payments are due | Beginning |
| Maturity Amount | ₹1,965,458.33 |
You can calculate the above using Future Value function of MS Excel/Google Sheets.
Now, let’s see what happens if you decide to withdraw the same amount of money as the insurance company promised from a SWP plan from 12th year. Remember, the insurance company’s plan takes a break in 11th year.
| Parameters | Values |
|---|---|
| Annual Interest Rate | 12% |
| Number of Premiums | 1 |
| Amount of Premium | ₹0.00 |
| Present Value | ₹1,965,458.33 |
| When Payments are due | Beginning |
| Maturity Amount | ₹2,201,313.33 |
So, at the start of 12th year, you have a balance of ₹ 22,01,313 to start your SWP journey. If you withdraw ₹ 96,210 yearly or ₹ 8,017 approx monthly for 25 years from the same index fund at same rate of interest.
| Year | Balance at Begin (₹) | Withdrawal (₹) | Balance at End (₹) |
|---|---|---|---|
| 1 | ₹2,201,313.00 | ₹96,210.00 | ₹2,369,260.56 |
| 2 | ₹2,369,260.56 | ₹96,210.00 | ₹2,557,361.83 |
| 3 | ₹2,557,361.83 | ₹96,210.00 | ₹2,768,035.25 |
| 4 | ₹2,768,035.25 | ₹96,210.00 | ₹3,003,989.48 |
| 5 | ₹3,003,989.48 | ₹96,210.00 | ₹3,268,258.21 |
| 6 | ₹3,268,258.21 | ₹96,210.00 | ₹3,564,239.20 |
| 7 | ₹3,564,239.20 | ₹96,210.00 | ₹3,895,737.90 |
| 8 | ₹3,895,737.90 | ₹96,210.00 | ₹4,267,016.45 |
| 9 | ₹4,267,016.45 | ₹96,210.00 | ₹4,682,848.43 |
| 10 | ₹4,682,848.43 | ₹96,210.00 | ₹5,148,580.24 |
| 11 | ₹5,148,580.24 | ₹96,210.00 | ₹5,670,199.86 |
| 12 | ₹5,670,199.86 | ₹96,210.00 | ₹6,254,413.85 |
| 13 | ₹6,254,413.85 | ₹96,210.00 | ₹6,908,733.51 |
| 14 | ₹6,908,733.51 | ₹96,210.00 | ₹7,641,571.53 |
| 15 | ₹7,641,571.53 | ₹96,210.00 | ₹8,462,350.11 |
| 16 | ₹8,462,350.11 | ₹96,210.00 | ₹9,381,622.13 |
| 17 | ₹9,381,622.13 | ₹96,210.00 | ₹10,411,206.78 |
| 18 | ₹10,411,206.78 | ₹96,210.00 | ₹11,564,341.60 |
| 19 | ₹11,564,341.60 | ₹96,210.00 | ₹12,855,852.59 |
| 20 | ₹12,855,852.59 | ₹96,210.00 | ₹14,302,344.90 |
| 21 | ₹14,302,344.90 | ₹96,210.00 | ₹15,922,416.29 |
| 22 | ₹15,922,416.29 | ₹96,210.00 | ₹17,736,896.24 |
| 23 | ₹17,736,896.24 | ₹96,210.00 | ₹19,769,113.79 |
| 24 | ₹19,769,113.79 | ₹96,210.00 | ₹22,045,197.45 |
| 25 | ₹22,045,197.45 | ₹96,210.00 | ₹24,594,411.14 |
You would be left with, yes, ₹ 2,45,94,411 approximately.
I was as shocked as you are right now. That’s in the ballpark of ₹ 2.5 Crores right there, without being locked down to anything. You can always choose to withdraw everything at any opportune moment. And the plan would have returned how much ? Just ₹ 34,05,250 in the same time period. Doesn’t sound like a Smart Wealth Plan now, does it ?
Investment and insurance serves completely different purposes. You want to do investment, jump into the market with mutual funds, index funds or by purchasing shares. You want death benefit or insurance, just buy a term insurance. Do not, I repear, do not get swayed by salesman pitches and drink this poisonous cocktail of insurance and investment.
Obvious Disclaimer: Money by design is subject to market risks. All calculated returns of index fund are an average estimate, loosely based on past performance and are definitely not a guarantee of future return. If the economy crashes, the currency you earn in, the insurance company that sells such plans, the index fund I was just boasting about and the bank that you keep your money in, everything would crash ( remember 2008 ? ). Always keep 6-months salary liquid spreaded across too-big-to-fail private banks as emergency fund. Even if devalued in such situations, cash would be still useful both for your sustenance and for buying stocks at low prices. Also, I am not a registered financial advisor. Please consult your own financial advisor before taking any concrete investment decision.