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Have you invested in life Insurance plans to get returns on maturity in future?Did your insurance advisor/agent persuade you to buy ULIP insurance for your child education or retirement?If yes, you are trapped under one of the poorly understood areas of personal finance: Mixing Life Insurance with Investment.I once did my internship in a life insurance firm where my role was to do market research to understand why people buy life insurance. I did surveys and personal interviews with a lot of people and was surprised by my findings:90% people do not understand the difference between various life insurance products: Term Plan, Endowment Plan, ULIP plan, etc.Most of the people want to buy an insurance plan because they want to save tax.They think insurance is one of the safest investment options where you get decent returns on your investment.I was shocked!Let’s understand in detail…Q. Do you really need life insurance? If yes, why?A. Yes, you need life Insurance to financially protect your family in case of death.But…Unfortunately, most of the people fall victim to Insurance Agents.Most of the people do not understand that the fundamental reason behind life insurance is to provide life insurance and not investment.Let’s see what are the plans available in India’s biggest Life Insurance Company:Can you observe something?Most of the plans are in the category of Endowment plans and Money back plans. Only 2 plans are in Term Insurance category.This is because Term Insurance is the least profitable category for LIC. In this category, people pay premiums just for financial support to their family in case of death. Since people in this category do not mix life insurance with investment, they pay less premium for a specific amount of life insurance.Whereas, an endowment plan, people pay a huge amount of premium for the same amount of life insurance in term plan. The only difference is they get a specific amount of money on the maturity of the policy.Let’s understand the calculations of LIC Endowment vs Term Plan:Endowment Plan:Term Plan:Source: licpremiumcalculatorDid you observe anything?In order to get minimum sum assured of Rs 50 lakh on death, you have to pay an annual premium of Rs 2,27,167 in endowment plan whereas in term plan you just need to pay Rs 8,496!If you compare monthly premium, you need to pay Rs 19,333 in an endowment plan whereas just Rs 708 in term plan.You are paying a total premium of Rs 35,61,310 in endowment plan and just Rs 2,12,400 in term plan. A difference of Rs 33,48,910.Now you will say that in endowment plan, you will get Rs 1.35 crore on maturity after 25 years and you will not get anything in term plan. In this case, if we take the difference between endowment plan and term plan premium and invest that amount in better options like mutual fund then we will get much higher returns.Monthly difference in total premium for 16 years: Rs 18,625 ( 19,333–708)Note: We are replicating investment strategy of endowment plan where the premium has to be paid for 16 years.If you make a SIP of Rs 18,625 in mutual fund and expect a return of 12% then after 16 years you will get Rs 1.1 crore. Now, you keep that amount in the mutual fund without any further investment and keep getting 12% return for another 9 years, then by the end of 25 years, you will have Rs 3 crore which is Rs 1.65 crore more than endowment plan return!Source: sipcalculatorSource: easycalculationConclusion: When it comes to life insurance, you should never mix it with investment and always opt for term plan.In case we are meeting for the first time,Hi, I am Sahil and I educate people on personal finance.Thanks for reading my answer.Follow me for more answers on money management: Sahil Bhadviya

Life insurance is a long-term commitment, so it’s important to go in with a plan. It can feel overwhelming but people should know these 3 things before shopping around:How much coverage you need. You can use an online life insurance calculator, or crunch the numbers yourself with a spreadsheet (no need to complicate things!). Basically, you need to look at your assets and your expenses and see where the financial gaps are. The easiest way is to break it down into 5 main areas:Future college costs for your kids (this is a huge financial concern for parents and should be considered on its own)Covering costs for children and other dependents (like aging parents)Debt (for most people this will be a mortgage, but it can also be your own student loan debt, a car loan, etc)End of life expenses (the average funeral costs around $10,000 — you don’t want to leave that to your loved ones)Other financial coverage (whether that’s retirement savings for a spouse, leaving money to heirs, etc)What kind of life insurance you need. Term life insurance will work for the majority of people who need life insurance. It’s straightforward: You pay for the policy for a certain amount of time. When the term is up, the policy expires. If you die during the term, the death benefit pays out to your beneficiaries. That’s it.But there’s also permanent life insurance — such as whole life insurance — that lasts for as long as you pay for it and has a cash value that you can build over time (subject, of course to certain terms and conditions). You can do things like borrow against the cash value for a loan. Permanent life insurance policies are more expensive than term, but they can be useful for people with complicated financial situations, or high net worth individuals who need to cover the estate tax and might benefit from the cash value.There are also a lot of different types of permanent life insurance. You should be aware of your options, but you can talk to a licensed insurance agent and/or a financial advisor to decide what type of policy would work best for your particular situation.How to compare policies. The easiest way to compare life insurance policies is on price (assuming you’ve narrowed your search to financially sound life insurers -- check their AM Best ratings). What’s the least you can pay for the amount of coverage you need? But there are other ways in which life insurance companies differ. Some companies are more competitive for certain health profiles. So if you’re an ex-smoker, you might find the process easier at one company than another. And some companies might offer different add-on features (called policy “riders”) that could be valuable to you (such as coverage for your children, or coverage for critical illnesses). Policygenius allows you to look at multiple carriers side-by-side so you can take care of everything all at once instead of visiting each carrier’s site individually (which can take a ton time).

Here is a YouTube video on why insurance is a bad investment:I think it is a big mistake to mix insurance and investment.If you are a layman who doesn’t understand anything about life insurance, then let me first quickly explain the type of life insurance.Broadly, life insurance is divided into 3 categories:Term Plan: Pure form of life insurance with very low annual premium. For example, If a person takes a term plan of Rs 50 lakh for 25 years and he dies during the 25 years then his family would get Rs 50 lakh. If he survives, he won’t get anything. So this plan does not mix insurance and investment.Endowment Plan: It mixes insurance and investment. For example, If a person takes a term plan of Rs 50 lakh for 25 years and he dies during the 25 years then his family would get Rs 50 lakh. If he survives, he would still get Rs 50 lakh on maturity. However, the annual premium would be almost 10–20 times of term plan.ULIP Plan: Unit Linked Insurance Plan where the money is invested in the mutual fund. This is similar to the endowment plan but the returns are not fixed.I have 5 reasons for not investing in endowment plans.#1 Pathetic returnsDo you know how much annual return do you get from the insurance cum investment?The problem is people don’t know how to calculate the return and the agents also never mention it.The reason is simple- The returns are pathetic. They are even poor than FD returns.#2 Lack of transparencyEndowment plans never disclose what they are doing with the money.Where they are investing it? How much goes into mortality? And that’s where I have a problem.#3 High Annual PremiumIdeally, a person should take insurance of Rs 1–2 Crore and if you take an endowment plan then the annual premium will rip you apart.People end up taking endowment plans for Rs 10 lakh or Rs 20 lakh but that’s not enough. If something happens tomorrow, how will the family survive with Rs 10–20 lakh? And if they take 1–2 crore insurance from the endowment plan then the annual premium would be probably higher than their annual income.#4 High commission of agent and the companyEndowment plans to eat a lot of profit from their customers in the form of commission.#5 High Surrender Charges and poor liquidityIf a person takes an endowment plan, he can’t exit for the next 5–10 years. In case, the person exit early, he would either lose all the money or would not even get the principal amount.This makes endowment plan a highly illiquid investment.ConclusionInsurance as an investment was introduced at a time when there were limited investment options. People were less educated and had little knowledge. Moreover, there was a trust issue due to various frauds. Hence, people opted for LIC investment due to their trust factor. However, the time has changed. Now, there are much better investment options with high liquidity, low commission, high transparency, and better returns. A person should never mix insurance and investment. Always take a term plan of Rs 1–2 Crore for life insurance and invest the money in mutual funds.