Why insurance is not an investment

Insurance and investing answer two different questions.

The same rupee struggles to do both jobs well, which is why the two are usually bought separately.

This page explains what term life and health cover do, what a policy bundling cover with a maturity amount does to your money, and what to read before signing. It names no insurer and recommends no policy.

Protection comes before investing

Every investment quietly assumes you will be around and earning while it grows. Protection covers the case where that assumption breaks. A long hospital admission, or the loss of the earning member, arrives at a date nobody chose, and without cover the money comes out of whatever has been saved — sold in a hurry, at whatever price the market offers.

Hence the order: protect the income and the savings, then invest what is spare. The two covers most households need do different jobs.

What term life cover is

Term cover is the plainest form of life insurance. You pay a premium each year for a fixed number of years. If you die during that period, the insurer pays an agreed amount to the person you named. If you live through it, nothing comes back and the contract ends. That is why the premium is small compared with the cover it buys: the contract pays for one event only. The premium is normally fixed for the term and set by your age and health at the start, so the same cover costs more the later you begin.

Who actually needs term cover

The test is simple: does somebody else’s monthly budget depend on your income?

Who does not need it

A person with nobody depending on their income does not need life cover. If no other household’s spending would have to change, there is nothing to replace, and a premium paid for it buys nothing. That covers a single person with no dependants and no loans, a young earner whose parents are independently provided for, and a retired person funded by a pension and savings. Cover on a child’s life is the same point: a child earns nothing a family depends on.

For a spouse who does not earn, ask what the household would have to start paying for. Sometimes the answer is “nothing in rupees”, sometimes “paid help and childcare”.

How much cover, and for how long

One way to a figure is to add it up: outstanding loans, the rest of the children’s education, and the household’s running costs until the dependants can manage without that income, less savings and cover already in force. What remains is the gap. The other way is a rough multiple of annual income, usually ten to fifteen times — a shortcut only, since it ignores your loans, savings and the years of dependence left.

Costs rise over time, so a figure that looks generous against today’s expenses may be thin fifteen years out. And the cover arrives as one lump sum: a family receiving ₹50 lakh is receiving a corpus somebody has to manage, not an income. On the term, the useful question is not “what is the longest available” but “in which year does the dependence end” — usually when the loans are closed and the children are earning.

What health cover does

Health cover pays hospital bills, and in doing so protects the savings you already have. A single admission in a private city hospital can run from a few lakh rupees upwards, money that otherwise comes out of what you had put away. A few terms decide how much of a bill you get back:

Why employer cover alone is thin

Group cover from an employer is useful while it lasts, but it ends with the job, and on the employer’s terms: it can be reduced or changed at renewal without asking you. The amount is set for a whole group, so it is often modest against one serious illness, and parents may be excluded or carry a heavy co-payment.

The real catch is timing. The day you most want cover of your own is the day the group cover stops, and by then you may be older, or carrying a condition a new policy treats as pre-existing.

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A policy that promises cover and a maturity amount

This is one contract that pays an amount if you die and also hands back a lump sum, or money at intervals, if you live. It goes by several names — endowment, money-back, savings policy, or a unit-linked policy whose savings part goes into market-linked funds. Nothing about it is dishonest, but it is worth seeing what the money does.

What your premium is actually doing

Each premium is split. One part buys the life cover. Another pays the costs of the contract: commission, administration, allocation and policy charges, and tax. What is left is invested, and that remainder grows into the maturity amount. The split is set by the contract, not by you, and the costs are heaviest in the early years, so the money working for you in year one is less than what you paid.

Why the cover is usually small

The same premium is doing two jobs, and the bigger the amount set aside to come back to you, the smaller the amount left to buy cover. In traditional policies the cover is typically a modest multiple of the annual premium, often around ten times: ₹50,000 a year supports roughly ₹5 lakh of cover. Set that against the gap the exercise above produces — commonly tens of lakhs — and the shortfall is the point. A pure term contract offers far larger cover for the same premium, because it has nothing to pay back.

Why the growth is usually modest

Three structural reasons. First, a policy promising a fixed maturity amount has to keep that promise, so the money behind it sits largely in bonds and government securities, and a conservative portfolio behaves like one. Second, the costs come out early, and money removed in year one is not compounding for the next twenty. Third, the figure quoted is often a fixed part plus bonuses, declared at the insurer’s discretion year by year.

The illustration is not a promise unless the document says that number is contractual.

What the regulator makes the illustration show

The regulator makes these documents show the maturity value under two assumed rates of growth, commonly 4% and 8% a year, and state plainly that both are assumptions, not projections.

Some people genuinely prefer one contract, which is a preference rather than a mistake. The structural point stands either way.

A contract doing two jobs at once is harder to compare, harder to price and harder to leave.

What to check before buying any policy

The claim process

Read who would make the claim, what documents they would need, and the settlement timelines the regulator sets. Check that the nominee’s name, relationship and contact details are current.

The exclusions

The exclusions are what the policy will not pay for, and they are where most disappointment comes from. Read the list before signing and again at renewal, as wordings change.

The exclusions worth looking for by name

On life cover, look at how death by suicide is treated in the early period. On health cover, look for named conditions left out, consumables not reimbursed, treatment outside hospital unless specifically added, and anything tied to an activity or occupation.

The waiting periods

A health policy does not cover everything from day one. Count these from the date the policy starts: cover bought early is worth more than cover bought at the first sign of a problem.

Moving to another insurer, you can ask for the policy to be ported, carrying over credit for waiting already served.

The free-look period

When the policy document reaches you, there is a window in which you can return it and have the premium refunded, less small deductions for the cover period and any medical test. Under the current rules this window is 30 days from the date you receive it. It is the one point at which leaving is cheap, so read the document rather than the brochure. If what you were told and the document do not match, the document is enforced.

What happens if you stop paying

The answer depends on the kind of policy, and here the two jobs part company sharply.

Term cover. There is a grace period after a missed premium — commonly 15 days on monthly payments, 30 days otherwise — during which the cover continues. After that the policy lapses and the cover stops. You can usually revive it within a set window by paying what is due with interest; the insurer may ask for fresh health evidence.

Health cover. The same, with an extra sting: if the policy lapses, credit for waiting periods already served can be lost, so a policy bought later starts those clocks again.

A traditional policy with a maturity amount. It acquires a surrender value only after a minimum number of premiums; before that very little comes back. Once it has a value, stopping normally turns it into a paid-up policy: no further premiums, a permanently reduced cover and a reduced maturity amount. Surrendering pays that value, in the early years usually less than what you put in.

A unit-linked policy. There is a five-year lock-in. Stop paying inside it and the policy is discontinued: the fund value, less the discontinuance charge, is set aside and paid out only after the lock-in ends.

The cost of stopping is highest in exactly the products that mix cover with saving. Worth knowing beforehand, because households stop for ordinary reasons — a job change, a move, a tight year.

Where to check things for yourself