Where to Invest Insurance or Mutual Fund?

First of all both life insurance (term insurance only) and investments (mutual funds, ppf, etc) are both important and necessary. They are like idli and chutney, you need both in right proportions.

To your specific question - is investment in insurance a good idea?

It is best to keep your life insurance and your investments separate. One product that can do everything is myth and does not happen in most cases.

Keeping these decisions separate you ensure that:

· You get appropriate amount of life cover through Term Insurance

· Your expenses are contained, that means higher growth and accumalation

· You have a better control, as you know which part of your portfolio is supposed to do which function

Are you confused where to invest insurance or mutual Fund?

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Human Psychology at Play while buying Insurance:

Term Insurance: If I buy a policy and pay a premium of Rs. 25K per year, after 10 years if nothing happens to me I would feel a loss of Rs. 2.5L since a term insurance policy will not return anything.

To overcome this behavior, where we do not want to take up a loss like this insurance companies lure us into buying savings product.

Now the fact of the matter is, no insurance company will pay you from your their pocket. Rather to give you a cover with savings, they will charge you a higher premium and invest that on your behalf.

You will just feel that you have not lost your premium money, as that gets hidden by the returns generated by the additional investment you are doing with them.

Very high cost of ULIPs and insurance policies erodes your capital

When a company offers insurance coverage along with returns on capital ( such as ULIPs or other plans from LICs) they charge very heavy commissions and management fees.

These commission fees are in the range of 10-25% hence the investor capital gets eroded because of the commissions and returns get affected a lot. Whereas direct mutual funds are zero commission mutual funds and the total expenses for fund management are 1-1.5% only. Hence your wealth does not get eroded in payment of commissions and mutual funds are better suited for investments. And specially for young people who can have a long term horizon of 5-10 years mutual funds can definitely provide better returns.

Mutual fund + Term plan - better option to get insurance coverage and long term returns

Having said that getting insurance coverage is also important hence a smart investor should go for 'Term plans' for insurance and investment in Mutual funds for wealth creation over long term.

'Term plans' are pure insurance plans which secure your family financially, by offering a high life insurance cover amount for a relatively low premium payment.

Here the management costs, commissions etc. are lower and you can get higher risk cover with very low premium.