The are many reasons why consumers go for insurance-cum-investment products.
For one, some think it is much easier to deal with a single product that covers their life and also helps them save.
What they don't realise is that a combined product is a more complex one, and the more complex a financial product is, the worse it is for them.
Some others find it difficult to come to terms with a 'term plan' because they want something in return for putting in their money even if they don't die during the term of the policy. Yet, others buy insurance-cum-investment products because they find the tax savings attractive.
There are even investors who keep collecting insurance policies - 10 or 15 of them! - as a means of saving taxes. But their reasoning is faulty.
As Sandeep Shanbhag, chartered accountant and financial planner once explained, "Buying an insurance product only to save taxes would be like meeting a short-term liability with a long-term obligation. These products are of long-term nature and though you've saved tax this year, you will be paying for it by way of future premiums for many years to come, thus negating the effect of saving taxes."
Rajesh Kothari of Alfaccurate Advisors also thinks using insurance products for investment is not a good idea , "because you will not go to a restaurant specialising in Chinese food when you want to eat South Indian food."
Insurance companies, however, have many ways of making their non-term products look attractive.
For example, you may have received messages from insurance agents or companies saying "pay only Rs 3500 a month and get Rs 1 crore after 15 years".
When we contacted an agency on receiving one such text message, the monthly premium turned out to be Rs 8000 instead of Rs 3500, on account of "agent fee, administration fee, fund manager's fee and other such costs that the company has to bear on behalf of the policyholder", as helpfully explained by the agent who happened to be from ICICI Prudential Life Insurance.
That takes us to the fundamental problem that all non-term insurance products suffer from: Lack of transparency.
If you pay Rs 5000 a month for an endowment policy, you do not know what part of it is invested and what part is used for risk coverage - or even what part of it is used for commissions!
In fact, even the maturity value is not known to investors in many cases. They only know that they will get the sum assured and some bonus - in case you stay invested for at least seven-eight years.
So the next time an agent tries to convince to take an insurance product that is also an investment, say "thank you, but I will just take the term plan".