Why insurance shouldn't be mixed with investment

My insurance agent has made around 30 different endowment policies for me, each with sum assured Rs 50,000. The term of these policies varies: beginning from 20 years, the term increases to, say, 21, 22, 23, 24 years and up to 30 years. Should I continue paying the premium, as it annually comes to Rs 51,000 premium? I am a middle class person (age 26) and earning Rs 3 lakh annually with no home loans and no car loans and dependents are my wife and son (age 1 month). My yearly expenses come to Rs 90,000. With these policies, if I continue, I am supposed to pay premium up to 65 years as the last policy has a term of 33 years.... Please suggest what can I do at this stage. If I lapse these set of endowment policies now, I lose around Rs 26,500, as I have got Rs 20,000 commission from the agent and considering the insurance cost of one year. I took this policy in August 2006 and I have paid premiums for one year. What should be my term insurance if I quit this endowment policy? Thanks (Name withheld) This was a mail a financial planner received recently. He and his ilk are used to people like this, who are saddled with a large number of policies, and regret the fact. "You come across large number of such cases. Often insurance agents put together 30-40 different policies and structure a product. They even give the product a name," says Amar Pandit, a certified financial planner (CFP), who runs My Financial Advisor. "Insurance agents often put together many insurance plans of different maturity and sell it to unsuspecting customers as a tax-free pension plan. They sell it on the premise that once you turn 55, one policy would start maturing every year, assuring you tax-free money every year. Mostly people fall for it as they don't bother to find out the details," says D Sundararajan, investment consultant, Trendy investment. Why do people fall for it? "Insurance agents are actually exploiting people's general aversion towards term insurance cover. Most people don't like the fact that they don't get any money from a term cover on maturity. Agents try to overcome this problem with suggesting endowment plans or ULIP (unit linked insurance plan), which will offer them money on maturity," explains Sundararajan. "It is a question of what the customer wants. You can tell them about the importance of adequate insurance cover, but if they still don't want term insurance, you have to sell them plans with a saving or investment element," says an insurance advisor, who doesn't want to be named. Financial advisors are quick to point out that going for "regular endowment plans" (insurance policies with saving element in it) or ULIPs (insurance policies which offer you diverse investment options) would deprive you of adequate life insurance cover. This is mainly because unlike term plans (insurance polices which offer you only risk cover; they have no saving or investment element and if your survive the term, you won't get any money) these plans are expensive. "Most people don't realise the importance of having an adequate cover. If you don't have adequate cover, your dependents would suffer if something happens to you. The basic idea of insurance is to provide money to your dependents on your death," says Sundararajan. The best way to avoid this confusion, according to him, is to keep insurance and investment separately. "Get a pure term cover for insurance purpose and opt for a mutual fund scheme for capital building or retirement," he says. P.S.: If you are saddled with as large a number of policies as our protagonist, you should try this option: "If you have bought these policies recently, say, three to five years ago, then get rid of them. Take whatever little you may get by surrendering them. Even if they don't have any surrender value, get rid of them," says Amar Pandit. "If you have bought them long ago and have only five to 10 years for maturity, continue paying the premium," he adds. And don't forget to get an adequate cover through a pure term insurance plan.
Source: Times of India, June 1, 2007