I wanna lose weight. Shall I be going to an Eye Doctor?

When was the last time you went to your eye doctor to lose some weight? 

Well, you probably didn’t. And even if you did, your eye doctor probably looked at you quizzically, shrugged her shoulders and asked you to go to a gym instead. 

If this seems so obvious, I am puzzled as to why smart, educated and super-achiever folks can’t figure out the difference between ‘insurance’ and ‘investment’.

Insurance, in my limited opinion is the action to protect one’s assets – be it property, health, or life. 

So, if I have bought a new car and have put a substantial amount of my hard-earned money into it, I will make sure that it’s safe and secure and doesn’t get stolen. But cars do get robbed and hence there is something out there called Insurance – to protect my investment.

So someone in the big bad world is ready to take a risk of my car getting stolen and compensates me by buying a new car for me, in return for a very small sum of money (premium) that I pay every year. 

How do they benefit? Well, they collect these small sums from lots of folks and have a simple calculation that everyone’s cars won’t be stolen together – so the money that they collect from lots of premiums is ‘more’ than the cost of replacing a few car/s. In doing this business, the Insurance Company lands up making a profit (in most cases, unless all the folks they insured lived in Bihar). (Bihar is a state in India in which politicians and local goons rob cars as a matter of fact). 

This business applies to Life Insurance, Health Insurance, Art Insurance, etc. 

Did you know that if you reserve an expensive boat cruise by paying upfront ‘non-refundable’ money, there is an insurance protection that can help you recover that money in the case if you change your mind and not go on that cruise! So the insurance folks by offering this policy have figured out that lots more folks finally go on that vacation than those who back out!

Similar Insurance folks have understood that Beckham’s knees won’t break or George Clooney will not lose his voice and hence ‘insure’ these stars by guaranteeing large sums of moneys if these bad things were to ever happen to them. 

‘Investments’ in my mind is the surplus money that you save and put aside from your hard-earned monthly earnings so that you can a) protect your money and  b) earn decent returns on it depending on your risk appetite. So, if you are a monk, you go in for bank deposits and savings accounts and if are a cowboy like me, you play the stock market.

Pray tell me, how and where is the scope for insurance and investment to be the SAME thing? In the past 15 years of meeting insurance folks, I have asked them this question and have never received a convincing reply! 

Some points:

  • Insurance premiums DON’T have to come back to you as ‘bonuses’ etc!

Think of them as the fare to take a taxi ride! A few years ago I bought a ‘term’ life insurance. The logic was simple – if I were to suddenly decide to take a rocket and meet God, my family whom I would have left behind, would have been paid a good sum of money. If I decided to stay and not to ride that rocket (and I didn’t), I would continue to pay the insurance company a premium that they would never be returned to me!

  • Don't buy insurance to save TAX!

Now, that's one of the most confusing and bewildering reasons I have come across, when it comes to buying Insurance. A large bulk of Indian Insurance policies are sold in the Jan-March quarter thanks to the zillion of agents out there who suddenly descend on hapless folks and get them to sign up insurance deals to save taxes...

Think of it like this - imagine you have been shipwrecked on an island and have a 100 bananas (earnings) with you - the island money (tax man) will take away 30 (tax rate) and let you survive on the remaining 70. It's logical to live and let live.

Most folks however, want to bury the 100 bananas, wait for the monkey to disappear (suffer the the 3 -7 year lock in) and then dig the bananas back from the ground, to eat them all by themselves! 

Sorry! It doesn't work that way! The present day benefits (think Net Present Value) of the bananas are not the same after 3-7 years ( factor in poor returns on the locked money and the corrosion of value thanks to inflation) !!

  • Understand the concept of ‘IRR’ thoroughly

it’s the calculation of MONEY OUT and MONEY IN over periods of time and what you did finally EARN in the end. This is the way car EMIs are calculated – do your own calculation for the moneys you are paying out annually (premiums) and what you will get back when all your hair turns white. In almost all cases, you will be shocked at the pathetic return. (Just google IRR and Insurance)

  • Be demanding on both fronts.

The problem with these ‘insurance cum investment’ policies is that you DON’T KNOW what to demand from whom. It’s like going to a friend’s house who serves you bread and butter to fill your tummy up. You can’t DEMAND that your friend serve you a 3-course meal coz you went to the WRONG PERSON for the WRONG PURPOSE.

So, go to a restaurant for a great meal and torch their pants if they fail – and go out for a drive with your friend and demand that she sings a song to you on the way coz in both cases the demand you make is reasonable!

The era that we live in has a specialist and a service for every wish you may have. So, don’t ask the plumber to repair your Wifi Modem – the Linksys guys are meant for that. 

****

 

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Also the same with Children's plans.
I was looking for a Child Plan for my kid, I researched a bit, met a few agents, found all of them really fcukall, nothing was clear or was any decent returns promised, also probably coz they are bound by IRDA not to promise any returns, all projection were some excel games.

http://www.bombaylives.com/index.php/child-plans-no-childs-play.html
I would like to add my 2 cents on this topic. Lot of insurance agents lure you with your kids education , marriage etc etc as the reason for taking insurance , and ditto for stock markets.

Alok has already explained difference between Insurance and investment. I want to talk about further dividing the investment in to 2 parts. 1] Investment for meeting known future expenses - child's marriage , education etc
2] Investment as a risk for high returns.

For the first one , I recommend you invest in Gold ETF's - Gold has taken care of inflation since hundreds of years. So think of your expenses in Gold. For eg. Childs Education will cost 1 kg of gold. Marriage 1 kg etc.
This will help you to be reasonably sure that you will have sufficient amount for the financial commitment.

And then investment as a risk for high returns can be done in stocks/real estate depending on your surplus and risk appetite.

Hope this helps.

Note: I am not a financial advisor or have no education in the same. This is my 'Banya Buddhi'. Take it or leave it.
I feel llike laughing my gut out when my insurance agents tries to convince me of some large premium policy that
indeed I will get back 48lack or so at the age of 90 ......I dnt know wht to say

hi Guys,

Alok I hope you don't mind, but I'm myself into Investment and Tax consultancy which I run from my home, as a customized investment or tax saving.

A lot of people buy policies on the basis to save tax and get good returns and they are fooled by this gimmick quite a lot of times, as we Indians want to protect our selves, where as in the United States people hardly have any insurance, instead they do investments in various markets and investment tools, and also have a huge retirement saving, no doubt they have the equal amount of debt too, but I have seen a lot of people save more than us. 

You might have seen The Suze Orman Show on CNBC. I would say it trained me a lot to go customizing for certain clients, thus I would suggest if you can please do click on the below facebook link, its my investment and tax consultancy, I don't guarantee but I customize, so don't ask me for returns of huge percentages, but I can make you invest and not be fooled by your broker, agent or whomsoever who says I can save you tax or give you good returns, as he is looking for his pockets to be filled first and then yours, where as in my case I'm happy with what I have, and I do it not for the money, but to impart knowledge, it is free on facebook but not one on one.

https://www.facebook.com/financialinvestmentanalyst

Alok if you feel I'm promoting my business via your post, please feel free to delete it.

Those who wish can go on to the contact details on the facebook page and we can have a conversation.

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