Many investors take decisions to invest funds in equity markets based upon the IIP which the Government of India releases.
IIP is the Index of Industrial Production. It is a barometer of performance of certain manufacturing sectors in the country. IIP would have direct impact on the movement of equity markets.
My IIP
Many a time, the same investors’ own ‘IIP’ is in a mess. Here the interpretation of ‘My IIP” is ‘My Insurance or Investment Plan.’ They either don’t have an insurance cover or it is combined in the form of life insurance policies that also have investment components.
Why take life insurance
Life insurance policies in India are taken either to save tax or help some relative, friend, associate who is an insurance agent to achieve his or her insurance premium collection target or number of policies target.
A friend of mine from Ahmedabad always says jokingly, most Indians die in the months of February or March. This is because many of us purchase life insurance policies in the month of February or March to save income tax.
Whenever a life insurance policy is purchased along with an investment component, I find it weird. Why purchase a policy which gives benefit if the insured does not die? If the individual is so certain that he is not going to die, then, why purchase the insurance cover?
In that case, opt for a pure investment product. This will ensure that the entire amount, equivalent to the premium, will be invested instead of a portion of it being used for obtaining life insurance cover.
Also, as a cardinal principle, never combine two financial products. For some reason one does not perform or its functionality is no more needed in an overall financial plan, it cannot become redundant.
“At the time of taking a home loan, we had also taken a life cover to ensure that in the case of any eventuality to me, Smita and children can repay the outstanding home loan from the proceeds of the life insurance cover,” said Venkatesh, an IT professional from Bengaluru.
“Because of prudent financial planning, we have paid back the home loan about five years earlier than originally planned, however, we have to continue paying life insurance premium as there is an investment component. If we surrender or stop the policy now, we will lose substantially,” he added.
Somewhat similar is the story of Harsh Jha. Immediately after his marriage, he purchased a life insurance cover along with an investment component. Over the years, he and his wife Swati have earned and created substantial wealth.
Once wealth crosses a particular level, there is no need for a life cover. This is because, in the case of death, there will be sufficient wealth to meet the financial responsibilities of the family.
Death of family member
Let me explain this briefly. In the case of the death of a family member, there will be an emotional loss. If that family member is also generating income, surviving members will suffer a financial loss as income earned by him or her will stop.
Therefore, life insurance is needed for all the members of his or her family. In case of the Jha family, if they were to discontinue the policy as they have accumulated substantial wealth and death of an individual will not cause any financial loss to their surviving family members, their life cover would also come to an end.
In both the above instances, if there were separate life insurance covers and investment plans based on the financial planning strategy, appropriate manoeuvring could have been done.
The example of Jash and Bijal was also interesting. They had purchased a life insurance policy along with an investment plan, popularly known as ULIP.
At the time of selling the policy, they were told that over a longer period of time, ULIPs perform well. In their case, compared with other similar ULIPs in the market, the performance was below par. However, they were stuck with it because there was insurance cover attached to it.
Professionally, I have always insisted upon having an insurance cover. Purchasing of insurance should be done much before embarking on a journey of investment and wealth creation. That is the bigger priority in life than investment. In fact, in the case of health insurance, I feel instead of having only one health insurance policy, there should be portfolio of health insurance covers to mitigate the risk of a variety of health issues.
However, never combine insurance and investment instruments. Before tracking IIP numbers, focus on ‘My IIP — My Insurance or Investment Plan.’
(The writer is a financial planner and author of ‘Yogic Wealth’)