Insurance policy: Good investment?

B. Venkatesh

THIS is the time of the year when most salaried classes scramble to buy life insurance policies.

People buy such policies, not with an intention to take an insurance on their lives, but to claim a tax rebate on the investment. The question is: Is tax rebate a good reason to buy insurance policies? In other words, are insurance policies good investments?

A good investment, of course, depends on each person's investment objective. You may consider Infosys a good investment. Why? Besides the regular dividends, you can profit by selling the shares in the market. You can also sell Infosys whenever you want to as the stock is liquid.

Will these rules apply to insurance policies? You do earn income on the most policies but not capital appreciation as life policies are not traded as, say, Infosys or Tisco's bonds. So, your only return on the investment is the excess money you get over the total premium paid. But is that return good enough?

To find this out, you have to compare the post-tax returns on life policy with the return you will get if the money is invested in some other instrument. Such an instrument need not be eligible for tax rebate. Why? Because your objective is to earn a higher post-tax return and not to simply avoid paying tax.

So, what if the post-tax returns from, say, Tisco's bonds is higher than from a life policy? You ought to be investing in the bonds and not buy the policy just to claim a tax rebate.

Then, consider liquidity if you are looking at a life policy as an investment and not as an insurance cover. The life investment fails on this count as you are stuck with a policy for life. Of course, you can pledge your policy and take a loan. But that is different from being able to sell your shares or bonds and buy them back later. You may want to consider these factors the next time you propose to buy life policies as an investment.