It is an indication of the sorry state of affairs in investor education that market linked insurance schemes get more fund inflows than mutual funds in India. The war between the capital market and insurance regulators was never fully resolved, though it led to some changes in structure of market linked insurance plans, and perhaps a lesser complex cost structure. It did not solve the issue of higher commission payouts to insurance salesmen, though it left mutual fund companies in the lurch – due to their inability to pay commissions to their distributors. Of course, a smaller evil cannot be a solution to a larger evil – and the world is not a perfect place – so while things have improved, the fact remains that investor education is still so low that financial products get sold rather than bought.
The fact of the matter is that everyone needs insurance, and everyone needs investment solutions. More important than that, everyone needs an ability to differentiate between the two, and a discipline to stick to the differences. Nobody except the companies selling them needs market linked insurance products. An individual needs adequate levels of low cost insurance, and a clear investment plan. A mixed product like market linked insurance product simply combines the two, adds some complexity to make it a nice sales pitch, and eventually depends on the investor’s confusion and the salesman’s skills to collect the premium.
Insurance is a game where you take a bet on your longevity, and pay a premium to protect against unexpected death or loss of earning power. The only basis for selecting insurance should be a product where the odds are in your favour – in the form of a low premium for a large insured sum, preferably at a young age. Investment is a game where you take a bet on the future earning capacity of an asset, and pay a price which you think is lower than the sum of future earning capacity. These are two unrelated things – and combining savings or investment plans with insurance – is like adding apples to oranges. The only excuse to go for a market linked insurance product instead of a mutual fund can be an investor’s lack of discipline which an insurance product provides no escape from, unlike a mutual fund or stock which can be sold in panic. But that is more an investor’s problem to solve through better education and self-discipline rather than locking himself to a high cost product.
If an investor has education and self-discipline, there is no reason whatsoever for him to go for a market linked insurance scheme – which is simply high cost investment in disguise. And in the absence of education and self-discipline, it is unlikely that anything can help him.