One Sunday afternoon, Aadeshna’s mother brought up the topic of the investments she had made in her lifetime. Her mother had retired last year from the Indian Post Office. Most of the investments were in the form of life insurance policies which were going to mature within the next 3 to 5 years time-frame along with some recurring deposits and fixed deposits. Her mother wanted Aadeshna to calculate the returns on the insurance policies. Aadeshna had recently graduated from one of the best B-schools in the country. Although not an actuarial professional, she had a clear understanding about Internal Rate of Return (IRR), Modified Internal Rate of Return (MIRR) among other concepts all finance professionals are privy to.And Aadeshna was curious to try them out!
Picture Credit: http://orixinsurance.com/
She did the math. Not one of the half dozen policies returned more than 6%. 6%! What is 6%? Doubling the money in 12 long years? (Click here to know how she calculated that in a jiffy!)
She explained to her mother how she could have enjoyed a better return, more liquidity and bigger life coverage if only her mother would have known that:
Insurance is not an investment. It is an expense. A necessary one, but an expense nevertheless.
That is lesson number 1, people. And while we understand it when we pay the insurance premiums for our cars and motor-bikes, somehow the cash value plans are able to fool us into believing that they add more value to our lives, when in reality there are better options available.
What are Cash Value Plans, you ask?
Clue: Aadeshna’s mother had opted for Cash Value Plans.
P.S.: The motive of the post is not to show that getting insured is not necessary. That is absolutely not true. Getting insured is imperative. But there is a better way to get insured which shall be discussed in the subsequent posts of this series on Insurance.
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Categories: Learning Money