Many people I know don’t have very deep knowledge of either #insurance sector or the #equity. They become easy prey for the insurance agents always on the lookout for an easy customer, so that they can bag their hefty commissions. They talk about your life goals and dreams and try to lure you on the pretext of fulfilling them. If you take a policy, you are asked to pay a premium for say 5 years, and then sit duck for 10 more years. So, the big question is what do you get after 15 years? For 15 or so, long years of your life you have kept your hard-earned money with, let’s say XYZ insurance company, trusting it to give good returns on your investment or at least just return you the premium paid.
But, the big question is – would you really smile after 15 years or you would feel like cheating with the policy returning zero or minuscule benefit. Let’s first get into the functioning of an insurer.
How Do Insurance Companies Work?
It is actually a kind of risk transfer agreement wherein the burden of your death is transferred to the insurer (XYZ Life Insurance Company) who will pay your family the designated amount as per the contract.
Insurance companies sell out policies to their customers, agreeing to pay the latter’s dependent a sum of money in case of his/her death. However, the customer is required to pay a premium for a definite period of time and then wait for what is called a ‘waiting period’.
Now suppose the XYZ insurance company has 100000 policyholders. On average around 30% of these policyholders will die in a year, making XYZ liable to pay them out. Not a big deal, as the company still holds the reserves from the remaining 70% of policyholders. But, also they have to regularly bring in new policyholders on daily basis to grow their business.
Where do Insurance Companies Invest Your Money?
A part of your premium goes to pay the agent’s commission, and the rest is invested by the company on government securities, real estate, #stocks, etc. The commission of an insurance agent ranges from 10% to 40% or even 60% in some cases, depending on the policy, its premium payment term, and the risk factor. For high-risk policies, agents are paid larger commissions.
The Loopholes of Insurance Policies
It is highly recommended that you ask your life insurance agent to give you a detailed benefit illustration of the policy. The first and most important thing to keep in mind is that the insurer will give you a return only on the investible portion but not on the total premium paid.
An insurance agency may lure you on the pretext of giving you an 8% return. What they don’t tell you is that the return will be something around 6.5% after the deduction of #GST, mortality charges, morbidity charges, rider charges, guaranteed benefit charges, etc.
Some nationalized banks give larger interests of up to 7.5% for normal citizens and 8% net for senior citizens. Wouldn’t it be better to park your money safely in a fixed deposit and earn interest Y-o-Y basis?
Moreover, if you cancel your insurance policy mid-way, you will not even get the full premium paid and will lose a good amount of it as a penalty.
Should we not have an insurance policy?
This is the most important part of this article. This is mandatory to get insured & transfer your risk to the insurance company but people only fall for insurance agents because of their less awareness about other options available. From the investment point of perspective is it ok to buy an insurance policy, pay the premium and then wait for a long period, never mind the gain or loss? A life insurance policy is to mainly covers your family’s risks in case of your untimely death, disability, or medical emergency. It would be a fallacy to look at life insurance from a gain point of view.
Equity – A Gainful Alternative as Compared to Insurance
If you are really serious about seeing your investment grow exponentially; stock market is the right place for you. All you need is some basic knowledge about stock trading and companies’ performance.
Let us understand the difference between life insurance and stocks with help of figures. A clever investment in stock market can amass your wealth over a period of 10-20 years, much more than the interest earned on your policies.
For example, if in December 2009 you had purchased stocks of #Avanti Feeds priced at Rs 1.66/share then, you would have become a millionaire in 2019. Per share price of #Avanti Feeds rose to Rs 569.3/ share on December 30, 2019 a steep rise of unbelievable 34000%.
Suppose if you were holding 100 shares of #Avanti Feeds buying them for only Rs 166 total, in 2019 December, that investment of Rs 166 would have been grown to Rs, 56, 930/- Just imagine if you had invested Rs 100000, in this stock back in 2019, it would have become 3.43 crore today.
#Avanti Feeds is just a tip of the iceberg and there are several other companies who might have turned your fortune in 10-20 years time period.
Some other companies whose share price had grown in large proportions in the past 10 (from Dec 31, 2009 to Dec 30, 2019) years are –
• #Caplin Point Laboratories Ltd – From Rs 1.65 to Rs 304.95 (18381.82% growth)
• #Bajaj Finance Ltd – From Rs 32.03 to Rs 4237.85 (13131.16% growth)
• #Safari Industries(India) Ltd – From Rs 7.26 to Rs 633.45 (8625.21% growth)
There are many companies whose share price will be high in coming future but for identifying them, and understanding their customer base and their behavior, you need the advice of a investment adviser. With correct advice and regular investments, fortune is only a matter of time.
Every stock does not perform!
Yes, it is true that every stock or share does not perform like Avanti feeds or Caplin or Eicher Motors but the investment is always made in the form of diversification. Diversifying a portfolio is the best way to protect unsystematic risk. & The most important benefit if you have all the potential stocks in your portfolio further there is a lot of probability that one or two stocks would perform extraordinarily. While investing one should always invest by having advised of experts i.e. Investment Advisers.
*Kindly have advise from expert for portfolio balancing before including stock in your portfolio.
*Investment in securities market is subject to market risk.
* Mr. Vinay Prakash Tiwari is a SEBI Registered investment Advisor