“You need to buy insurance”, suggested Mr. Verma, an insurance agent, to Rishabh who graduated from a top B-School, landing a job in Morgan Stanley.
“Beta aap kamane lage ho, aapko jeevan bima ki jaroorat hain” (You have started earning and you need Life Insurance) added Mr. Verma. Over the years, parents, peers, colleagues, and society played an important role in shaping Rishabh’s outlook towards money. He was expected to follow the social norms without challenging them.
And Rishabh, like most Indians, was a conservative investor. He preferred capital protection over the risk of beating the market. Fixed Deposit, Recurring Deposits, NSCs, KVPs, PPF, Gold, Real Estate, and Insurance were the prominent products he invested in.
“They guarantee peace of mind and I receive a fixed sum of money on maturity sans market fluctuation. Why should I bother to invest anywhere else?” were his rationale about his investment choices.
For Rishabh, Mr. Verma was a well-meaning friend who had been with his family for years and his advice was gospel truth. Over the years, he had invested heavily in insurance until he met Prathamesh, a Certified Financial Guardian, who busted the myths Rishabh long believed to be true.
Myth # 1: Insurance is synonymous with investment
Rishabh, like many novice investors, believed that insurance is an investment product. Insurance companies, agents, and proponents of insurance as an investment cemented this view through advertisements and brochures. The use of positive psycho-socio terms like “Guaranteed Returns”; “Waiver of Premiums”; “Child Plans”; “Capital Protection”; “Bonus”; “Pension Plans” resonated with his “take-no-risk-attitude”. This was seriously hampering his investment performance and his financial goals.
Even the neighborhood bank had positioned life insurance as a “one-size-fits-all” product, offering it as the lifeline to achieve all financial goals; ignoring the fact that in the long run, it offers a paltry return of 3 to 6% p.a. on investment.
“Just think for a moment”, Prathamesh suggested. “Is that all what you are looking for when you stay invested for over 10 years? Aren’t there any other products that can offer a higher return on your investment? Wouldn’t it make sense to invest in those products?” These questions made Rishabh reconsider his decision to invest heavily in insurance and ignore the importance of asset allocation.
Myth # 2: Purchase insurance at the earliest
“Insurance is a tool to underwrite financial risk. Risk changes from person to person and a right fit needs to be evaluated. Blindly purchasing a policy, at the earliest phase of one’s career, because that’s what society tells you to do is a financial faux-pas” Prathamesh point out.
Insurance should be purchased when one has dependents whose financial wellbeing is dependent upon the primary bread winner. E.g.: young children, a housewife, and elderly parents.
Before anyone decides whether you need insurance or not, self-introspect by asking, “What would happen to my family if I were to die today?”
The answers spontaneously appear…
An individual, in his early 20s (like Rishabh) with no dependents, will not need insurance. On the other hand, an individual in his 50s having dependent children, parents, or an outstanding loan would definitely need insurance.
So, purchasing insurance is contingent to “dependency and the responsibilities to shoulder” rather than “age” of an individual.
Myth # 3: No point purchasing term insurance
“What’s the point of purchasing term insurance when you receive nothing for survival?” questioned Rishabh, realizing he was looking at insurance as an investment option with the expectation of rewards for choosing delayed gratification.
“Is it?” Prathamesh smiled cheekily. “Revisit Myth # 1, if you think so…”
Rishabh saw his “investment beliefs” going down in flames. He had realized that insurance is not an investment vehicle and neither was it required to be purchased at the start of one’s career. His conversation with this CFG had helped him reconsider his investment outlook before it was too late.
Investing is not about finding the right approach; it is more to do with your approach; it is personal. When approaches change and so do the results. But every time you decide to invest in insurance, ask yourself if the decision will help achieve the goals you plan and dream about. Is it the most beneficial and prudent way to save? At times, it is confusing and the decision can seem overwhelming, but help is at hand Certified Financial Guardians can guide you on the right path.
Have you believed in any of the above myths earlier? If yes, what made you change your outlook? Do share your thoughts with us below.