Insurance Vs Other Investments – Every thing you need to know

(Last Updated On: February 16, 2019)

Insurance Vs Other Investments – Every thing you need to know. May be you are in a happy moment with some money in hand to invest or want to get yourself prepared for a future expense. Well, what ever may be the case, in the current financial scenario, there is a plethora of investment options available to all. Insurance is one among them. You may be interested to know how insurance as an investment performs when pitched against other investment options available.

Before going deep into the comparisons, let us have a look at some basic points every investor should be aware of.

Investment Vs Savings

The words ‘Investment’ and ‘Savings’ are generally considered synonymous by many, but, the fact is that they are entirely different in their scope and purpose. To make it simple, we ‘save’ money to make an ‘investment’ at a later time. Generally investment needs a bulk corpus fund which is created through savings plans. So it is better to approach insurance linked savings and insurance linked investments separately.

Why do you need a savings plan?

Financial needs of the future are often overlooked till they knock at your door. And invariably you will be late for starting a new at that point of time. So it is always advisable to start as early as possible.

Someone’s sitting in the shade today because someone planted a tree a long time ago.

Warren buffet

Risk Vs Returns – Strategy to be followed

The principle of ‘Risk – Return trade off‘ clearly states that ‘low level of risk’ is associated with low returns investments where as ‘high level of risk’ is associated with high return investments. In other words invested money can render higher profits only if the investor is willing to accept the possibility of losses. So before aspiring for highest returns available in the market it is wiser to decide on the level of risk you can take for that investment.

Savings element and Risk Element – Components of Insurance Premium

Generally Insurance policies provide two types of benefits viz. Insurance benefits and Investment Benefits. So naturally the insurance policy premium includes both these components. If you want to compare an insurance policy with other investments, these components need to be separated. Read a detailed article on separating the insurance and savings components in an insurance policy premium and then calculating the rate of return from the link given below.

Read more: Life Insurance Policy Investment Returns – How To Calculate

From this article you can see that savings element of LIC’s Endowment plan is providing an interest rate of around 7.93 % compared to the bank interest  rate of around 6%. Internal rates of returns of other schemes can vary based on the benefit pattern of the scheme.

Popular alternative investment options available in India.

Let us have a look at the top 10 investment options available in India.

NumberInvestment OptionsMinimum Investment AmountMinimum Investment Period
1Equity/ SharesNo LimitNo Limit
2Mutual FundsRs. 500No Limit
3Real EstateNeed large corpus fundNo Limit
4GoldNo LimitNo Limit
5Bank Fixed DepositsNo LimitAs low as 7 days
6Post office MIS schemesRs.15005 years
7Insurance Savings plansVariable10 Years
8Unit Linked Insurance plansVariable5 Years
9BondsVariableVariable
10Savings BankNo LimitNo Limit
Equity / Share investment Vs Insurance Investments

Equity or Share investment bears high risk profile. Even though there is a chance of getting high returns over long term, risk of loosing the invested amount also is there. Cautious approach is recommended here. Segment the investment corpus available based on your risk appetite and invest only a portion of it. The new tax regime introduced by Government of India has imposed Long Term Capital Gain Tax for equity investments and is bound to reduce the returns by 10 % from 2018-19.

On the other hand, Insurance investment provides low risk investment opportunity with medium returns. Those who are investing in Shares can look for insurance investments to compensate and complement the high risk involved in share market investment.

Mutual Funds Vs Insurance Investments.

Mutual fund is an investment vehicle made up of a pool of moneys collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and other assets. Even though mutual fund involves slightly lower risk compared to direct equity investment, risk involved is still high compared to other investment modes. Long Term Capital Gain Tax is applicable to mutual fund investments also.

As in care of direct equity investments, Mutual fund investments along with insurance investments provide a balanced risk profile.

Real Estate investment Vs Insurance Investments

Real Estate investments can provide good investment returns in long run. But, several external factors in which you don’t have active control will have to work together to give you good returns here. Your investment may bear the risk factors including Government Policy decisions and changes in the land usage related rules. Further, real estate investment involves huge fund corpus and provides low liquidity. You may not be able to en cash your property as and when the need arises. Insurance Investments, along with real estate investments can help you to create provisions for some degree of liquidity, utilising loan facility available with insurance investment.

Gold investment Vs Insurance Investment

Investment in Gold can be done through two modes. Ornaments and Gold Exchange Traded Funds (ETF’s). Purchasing gold ornaments as investment option is not recommended as it will involve making charges and other charges which eat into the principle amount invested.

Another option is to invest in Gold exchange traded funds (ETF). The chart provided below will give you an idea on the returns provided by top ETFs. The returns provided by ETF investment in medium term is really low compared to insurance investments.

ETF Scheme1 Month3 Month6 Month1 Year2 Year3 Year5 Year
Religare Invesco Gold ETF-1.513.28.110.70.92.45.6
SBI – ETF Gold-1.513.28.210.71.62.55.7
ICICI Pru Gold ETF-1.413.38.310.51.52.55.6
Quantum Gold Fund-1.613.1810.51.52.45.6
HDFC Gold Exchange Traded Fund-1.513.28.110.31.42.35.5
Bank Investments Vs Insurance Investments.

In the current economic scenario, bank interest rates continue to dwindle day by day. Latest bank FD Rates of major banks are shown in the table given below.

INSTITUTIONGROUPINTEREST % p.aPERIODINVESTMENT (Rs)TAX STATUS
The Ratnakar BankIndian Private Sector Banks7.412 month to less than 24 monthLess than lakh to Rs. 1 crTaxable
Shamrao Vithal Co-operative BankCooperative Banks7.25AV Deposit Scheme – 366 Days (Simple Interest)Less than Rs. 1 crTaxable
Bombay Mercantile Co-operative BankCooperative Banks7.25Above 1 year to less than 2 yearsLess than Rs. 1crTaxable
Bassein Catholic Co-operative BankCooperative Banks7.25Above 12 Months to 18 MonthsLess than Rs. 15 lakhTaxable
Yes BankIndian Private Sector Banks7.1518 Months 8 Days to 18 Months 18 DaysLess than Rs. 1crTaxable
Axis BankIndian Private Sector Banks71 year to less than 13 monthsLess than Rs. 1 crTaxable
Zoroastrian Co-operative BankCooperative Banks71year upto 24 monthsLess than Rs. 1 crTaxable
Indus Ind BankIndian Private Sector Banks71 year to below 1 years 2 monthsLess than Rs. 15 lakhTaxable
Bandhan Co-operative BankCooperative Banks7Above 1 year to less than 2 yearsLess than Rs. 1 crTaxable
Tamilnad Mercantile BankIndian Private Sector Banks720 months 20 daysLess than Rs. 15 lakhTaxable
Lakshmi Vilas BankIndian Private Sector Banks71 year to 499 daysLess than Rs. 1 crTaxable
Deutsche BankForeign Banks6.9Above 1 year to 1.5 yearsLess than Rs. 1 crTaxable
Punjab National BankPublic Sector / Nationalized Banks6.91 yearLess than Rs. 1 crTaxable
Standard Chartered BankForeign Banks6.91 year to 375 daysLess than Rs. 1 crTaxable
Oriental Bank of CommercePublic Sector / Nationalized Banks6.851 year to less than 2 yearsLess than Rs. 1 crTaxable
DCB BankIndian Private Sector Banks6.8512 Months to less than 18 monthsLess than Rs. 1 crTaxable
Kotak BankIndian Private Sector Banks6.8390 Days (12 months 25 days)Less than Rs. 1 crTaxable
J&K BankIndian Private Sector Banks6.751 years to less than 2 yearLess than Rs. 1 crTaxable
Karur Vysya BankIndian Private Sector Banks6.751 year to less than 2 yearsLess than Rs. 1 crTaxable
South Indian BankIndian Private Sector Banks6.751 year to 599 daysLess than Rs. 10 lacsTaxable
Federal BankIndian Private Sector Banks6.75Above 1 year to less than 15 monthsLess than Rs. 1 crTaxable
Canara BankPublic Sector / Nationalized Banks6.751 yearLess than Rs. 1crTaxable
HDFC BankIndian Private Sector Banks6.751 YearLess than Rs. 1 crTaxable
UCO BankPublic Sector / Nationalized Banks6.651 yearless than Rs. 1 crTaxable
Central Bank of IndiaPublic Sector / Nationalized Banks6.61 year? to less than 2 yearsLess than Rs. 1crTaxable
ICICI BankIndian Private Sector Banks6.61 year to 389 daysLess than Rs. 1 crTaxable
Vijaya BankPublic Sector / Nationalized Banks6.6More than 1year to less than 2 YearsLess than Rs. 1 crTaxable
Allahabad BankPublic Sector / Nationalized Banks6.61 year to less than 2 yearsLess than Rs. 1 croreTaxable
Bank of BarodaPublic Sector / Nationalized Banks6.55Above1 year to 400 daysLess than Rs. 1 crTaxable
Corporation BankPublic Sector / Nationalized Banks6.5445 days to 554 daysLess than Rs. 1 crTaxable
Syndicate BankPublic Sector / Nationalized Banks6.51 year exactLess than Rs. 1crTaxable
Catholic Syrian BankIndian Private Sector Banks6.51 YearLess than Rs. 1 crTaxable
Abhyudaya Co-operative BankCooperative Banks6.5Above 1 year to 455 daysLess than Rs. 1 crTaxable
Indian Overseas BankPublic Sector / Nationalized Banks6.5Above1 year to less than 2 yearsUpto Rs. 1 crTaxable
Dena BankPublic Sector / Nationalized Banks6.5Above 1 year to less than 2 yearsLess than Rs. 1crTaxable
United Bank of IndiaPublic Sector / Nationalized Banks6.25Above1 years to less than 2 yearsLess than Rs. 1 crTaxable
State Bank of India (SBI)Public Sector / Nationalized Banks6.25Above 1 year to 455 daysLess than Rs. 1 crTaxable
Indian BankPublic Sector / Nationalized Banks6.25Above 1 year to less than 2 yearsless then Rs. 1crTaxable
HSBCForeign Banks6400 daysLess than Rs. 1crTaxable
Citi BankForeign Banks5.25401 days to 540 daysLess than Rs. 1 crTaxable
Royal Bank of ScotlandForeign Banks41 year to less than 2 yearsLess than Rs. 1 crTaxable

Bank interests are subject to the Income Tax and the returns shall be reduced by the applicable tax. On the other hand, insurance investments are following double exemption pattern. The premium paid is eligible for income tax exemption under section 80C and the maturity is exempted under section 10(10D) of income tax act.

One other hardship faced by investors in case of bank Fixed Deposits are, interest rates are not guaranteed for a longer period. If a person wants to do a fixed deposit for the marriage or education of his daughter for a longer period  (Say for 15 Years) he will not receive the same interest rate through out the period. He will have to reinvest the amount several times, at the interest rate available as and when the FD matures. In the current scenario of reducing interest rates, he may not get the expected returns at the time of maturity.

The advantage of bank fixed deposits are the high degree of liquidity it offers. So it is the most sought after method for parking emergency funds.

Post office Small Savings Vs Insurance Investments

As per the latest announcement of Government on the post office small savings interest rates,  interest rates has been reduced around 20 BPS or 0.2% for all its schemes (except Savings Account ) for the period Jan to March 2018. The latest post office Small Savings interest rates are given below.

Latest Post office Small Savings Schemes Interest Rates 2018 Jan – March
Sl NoScheme NameLatest interest RateFequency of CompoundingEffective Return
1Savings Deposit4.00%NA4.00%
2Term Deposit 1 Year6.60%Qly6.76%
3Term Deposit 2 Year6.70%Qly6.87%
4Term Deposit 3 Year6.90%Qly7.08%
5Term Deposit 5 Year7.40%Qly7.60%
6RD – 5 Years6.90%Qly7.08%
7NSC – 5 Years7.60%Yearly7.60%
8Post office Monthly Income Scheme (MIS)7.30%NA7.30%
9Public Provident Fund (PPF)7.60%Yearly7.60%
10Senior Citizen Savings Scheme(SCSS)8.30%NA8.30%
11Kisan Vikas Patra (KVP)7.30%Yearly7.30%
12Sukanya Samriddhi Scheme8.10%Yearly8.10%

Senior citizens scheme is offering the highest rate of interest at the rate of 8.30% followed by Sukanya Samrriddhi Scheme.

Read More:

Read every thing about Recurring Deposits and calculate the maturity value of RD using RD Calculator.

I have given an over all idea on the alternative investment options and the possible returns here. Please go through it and take informed decisions.

Add a comment here..

error: Content is protected !!