Have you ever heard analysts/expects asking to combine insurance and investment?
How often was that?
You would have heard as many times as you drink water in a day!
Believe me, this phrase is not for a quote this is just the hopper.
In this blog article let’s discuss all aspects of this particular phrase which will eventually help you to arrive at a logical answer to this particular issue.
Spoiler Alert: Do not combine insurance and investment!
To understand this, we need to go back in time.
The Indian insurance industry was monopolized by LIC for nearly fifty years.
It came into existence somewhere in the 1950’s.
Until the private players came into the market, the industry was totally dominated by LIC.
At that time what do you think people bought?
Did they really buy insurance?
Nah! They bought tax exemptions!
People bought insurances, not for the purpose of buying insurance from calculations rather they wanted to save on the taxes.
The money-back policies, endowment policies of LIC’s dominated for about 50 years with no competitors making way to become a household name.
People didn’t realize that by putting their corpus into these endowment vehicles they were losing a big amount!
Between 1985 – 1994, the bank interest rates in India were skyrocketing.
It was at a whopping 14%, your money would be doubled in 5 years!
During this particular period of time, the returns from the endowment policy were just around 6%
There is another problem to the story and that the problem was supposed to be heard by a lack of movie insurance you have to be a very hefty premium.
Nobody would think of insurance as a kind of an investment but on the other way they would think of it as buying insurance of 1 Lakh would mean paying high premiums.
Therefore, in the bargain people neither bought separate insurance nor all of the money that was put in this class was working in favour of them.
Hence, they saw keeping money in the bank as an opportunity.
The next question which might spring up in your mind may be, then why did people opt for such plans?
There are two explanations for this one,
People must have never heard about an alternative for LIC.
LIC was luring people to invest in these particular plans as a tax advantage.
Nobody wanted to pay tax.
It is very safe to say your insurance policies neither earned you good returns nor did they help you with a good amount of insurance cover.
To buy the insurance, very often it requires a magnitude that one has to put in a lot of money so the insurance policy neither gives you sufficient interest nor did the money work for you.
Therefore, the statement “do not combine insurance and investment holds true”.
In the next era, i.e, in 2000, the insurance sector in India got privatized.
It is ICICI, who joined the league first followed by several others like SBI HDFC.
These insurance companies had one set of problems.
Nobody believed these private insurance companies!
Everybody believed only LIC, it is a license a government company, it has been there for fifty long years, the agents of LIC have household names.
In short, nobody was prepared to believe any of them.
These private players knew they had to stand out!
They knew they had to think differently and with the plan of a traditional endowment policy, they will definitely have no chance to stand against LIC India.
So they came out with a concept of ULIP’s (Unit linked insurance blocks).
Between 2000 – 2010, these private players were helped by several factors.
Regulators were very kind, and they earned leniency.
Also, during 2003, markets witnessed bull runs, which led to people making abundance.
The plans are designed in such a way that whatever the contributions were made one needs to need to invest in smaller amounts, smaller than that of the insurance companies.
The once whose abundance sky-rocketed, with such unique plans, almost forgot about the problem which was present in these plans.
A plan, which was designed to sustain a long-term investment strategy eventually got sold as a short-term plan.
And there was massive mismanagement of sales apparatus by insurance companies and regulators of course were lenient.
The invested ULIP’s qualities lost huge amounts of money have they would drop but those guys who stayed in the loop blocks continue to pay into the plan and they made it listed for a long time they did to make money but those guys who walked out thinking that these plans are meant for only three years of investment lost big time.
During this phase too, “Do not combine insurance and investment” is very apt.
ULIP was not a bad word nor a bad invention.
The problem was the combination of bad design bad execution.
People did make money but the investors fell short of this money because of the bad design of the plan.
All the games on the bull market what is eaten away by the charges which have gone but to either the insurance industry or the people who are in the sales apparatus.
That’s how a game when ULIP’s took off, the word “insurance and investment” should not become one game.
Post this the Mutual Fund revolution dawned, with one side ULPI’s were gaining grounds and on the other Mutual fund growing its roots in India.
The mutual funds which are on offer didn’t have the same problem that of a ULPI.
It did not have a huge expense structure of the universe the mutual fund industry added sales operators needed a catchy slogan to promote the mutual funds and this Logan do not combine insurance and investment came handy to all the mutual fund sales operators.
That’s how it was promoted by them.
But actually, mutual fund distributors did one good thing to the insurance industry.
They promoted “Term Insurance” than anybody else.
The only reason why Mutual Fund promoters promoted MF was that they wanted to kill the ULIP plans.
And moreover, to compensate for the loss of Insurance they called on ‘Term Insurance’ are going to be cheaper it’s a good idea to combine mutual funds and retirement plans and they give a valid statement and it stuck in the minds of people.
It’s not the mutual fund industry was saintly, even they didn’t escape problems.
They’re also the mutual fund distributors use to churn the funds, all kinds of wrongdoings followed but regulators came heavily on the mutual fund industry.
It’s then that the industry evolved itself and has become a much cleaner industry.
In 2010, new regulations in the ULPI space came into existence
There are several changes made, caps were put on charge structure, the number for years a person has to be put in the plan had been increased, amount of insurance that has to go into the plan has also been increased.
The industry which has all the problems of the past decade has been cleared by the new regulation which came in the year 2010.
Also, ULPI started becoming a cleaner product.
Simultaneously market started accepting term insurance as an acceptable means of insurance.
It’s not that that term insurance was not present in the earlier days, in fact during the LIC dominated they had term insurance but it was just not selling
Thanks to the mutual fund distribution fourth, they popularized term insurance as an acceptable form of insurance.
The period between 2010 – 2020 is the revolution for both the insurance industry as well as for the mutual fund industry.
This is a time where tax rules got changed.
Investing in equity funds out of mutual funds or tax-free.
2018 equity mutual funds started coming under capital gains tax and the profit that you could be making these plans came under 10%capital gains regime.
Whereas today the ULPI plans are tax-free, provided you have 10 times if the insurance in the plant than the amount in the premium that you’re paying.
If you for paying a lakh of rupee as a premium, if the insurance is 10Lakhs and above then the maturity proceeds under your ULPIs are any insurance plans that is tax-free.
Even the traditional endowment plans of insurance companies went through the change.
Earlier people used to calculate the premium based on the level of insurance.
This was required if people needed a lack of will be they used to come back and calculate how much a premium that they have to pay.
Instead, these days the endowment plans went through a change.
They just got designed as an investment product!
if somebody wants to put a lakh of rupee or 5 Lakh rupees,10 times of that amount has to be there as an insurance component to get them to fax break.
This game changed endowment insurance.
What was at one point in time problematic insurance, the endowment plans also started becoming very attractive after 2018.
The ULPI plans became more attractive because they were tax-free.
Compared to mutual funds they have become cost-efficient due to the new regulations and the old system of believing that do not combine insurance and investment no longer holds good.
Today you have got ULPI plans and they enjoy a very good tax arbitrage.
Now you have got endowment plans which will generate almost the same as bank fixed deposits but will not come under taxation.
When people have so many benefits it is not currently on our part to blindly assume that do not combine insurance and investment.
Today, the insurance industry is competing both with the banks as well as with the Mutual fund industry