Cover first gains later

'Insurance should be seen as a hedge against one's life and not an investing instrument.'

If you don’t make mistakes, you don’t learn anything. The art is to learn from mistakes not only your own but that of others and not to repeat those. Sometimes when we are lucky, the financial mistakes are small and we laugh over it, at other times the mistakes have large impact and we rue over it for the lifetime.

Insurance is by far the most complex financial instrument that takes into account inflation, economic cycles and your life expectancy among other things.

And, it is the only financial instrument that disciplines one to make contributions over the long term. But the big question that arises is what are the most common mistakes individual investors make and how could these mistakes be avoided? First understand what you are buying.

Insurance is a hedge against one’s life and should be looked into that way and not as an investing instrument. Most of us make this mistake while investing in life insurance. Life insurance is a long-term investment tool and if we try to use it for short-term objectives the returns may not be as per the expectations.

Sunil KakarThat is why it is advisable to invest early and invest over a long period in life insurance. All this without forgetting the fact that insurance is a risk cover instrument for your dependents if something were to happen to you.

Next, insurance should serve a need. Ask yourself what the policy is for. What do you plan to achieve from it. As nobody can predict the exact date of your death, you need to periodically review your insurance needs. However, most of us make the mistake of either overreview or under-review. A person who reviews his longterm investments on a daily or weekly basis will be oscillating between agony and ecstasy. Similarly it would be a folly to review short-term investments only once in a year or so.

Insurance needs should be reviewed with change in lifestyle, different stages in one’s life and increase in income. And, one must realise that unlike other comparable financial products, life insurance cannot be compared. However, in recent times, Ulips that are insurance-cum-investment products are bought and sold on the premise of returns.

Human psyche is such that one looks at returns while getting into Ulips forgetting the basic premise that it is an insurance product first and then an investment one. Say, for instance you take a 15-year Ulip for a Rs 10-lakh cover. Comparing its return of 18% to a mutual fund returning 27% is incorrect. If you were to die in the third year the mutual fund would pay your beneficiaries what the NAV on that date would be. However the Ulip will pay the sum assured of Rs 10 lakh. In recent times the debate on Ulips has been a bane of sorts with many buyers mistaking it to be a short-term investing instrument when it is a long-term insurance cover. This is one of the biggest mistakes which come in more from human greed.

It is important not only to know what the common investment mistakes are, but also to take necessary steps to avoid those. Everyone cannot be a financial planner and it is best left to experts who can balance your needs with the investment options. It is also important to improve your financial literacy and to know more about the investment options available with you so that you take an informed decision and do not repeat the investment mistakes many have made before you and many more will make in future.

By Sunil Kakar, Chief Financial Officer, Max New York Life Insurance