One of the concepts that we hear in the market is that it is better to buy term insurance for one’s insurance needs and invest in mutual funds to get higher returns.

There is nothing wrong to offer term insurance to a customer who wants insurance but does not want a savings plan along with it. The question however is: Does the customer really want only term insurance? 9 times out of 10, the customer does not really know whether he wants only term insurance. He has not applied his mind, not analysed the insurance and other savings solutions to his needs, and may be blindly following an advice from the newspaper or a friend.

In this blog I have written a number of articles that show mutual funds do not give higher returns all the time. In fact in about 50 % of the cases they give less than 8 % return. Which mutual fund will give higher returns is not known at the time of purchase. There is a high risk in the investment. Unlike investment in bank fixed deposits or endowment plans of life insurance, which are low risk.

There is another important aspect to this comparison of mutual funds to endowment as the investment alternative. Mutual funds are risky while endowment insurance is not. It is scientifically wrong to compare risky investments with low risk ones and claim that the risky investments give you higher returns. Risky investments do not give higher returns. Investors invest in risky investments in the hope that they will get higher returns, which 50 % of time does not happen. We must compare apples with apples and oranges with oranges. We should not compare apples with oranges.

As a true and sincere advisor your task is to first help the customer come to an informed decision. And if that informed decision is term insurance, you should sell only term insurance. How does the customer come to an informed decision? Follow the steps mentioned below.

Step 1: Appreciate the customer for having come to a decision to buy insurance.

Step 2: Ask permission to review his financial planning

Step 3: Identify the customer’s short term and long term financial needs

Step 4: Classify his/her current investments into short term and long term

Step 5: Find the gaps in short term and long term needs

Step 5: Classify his investments and savings into low risk and higher risk investments

Step 6: Ask the customer whether he/she would like to invest for long term needs in higher risk or lower risk investment

Step 7: Help the customer with data and facts from RBI that shows people invest for the long term in lower risk investments

Step 8: Show the customer his or her long term, low risk options: PPF and life insurance. Explain that PPF has withdrawal options and so one is tempted to withdraw and not have money for the purpose it is being saved, when required. Life insurance endowment is low liquidity, which ensures that the customer gets the money in the period when the money will be required.

Step 9: Help the customer to see the benefits of a policy while he or she is alive and not only when dead – the benefits like a happy retired life, or good education for children

Step 10: Now ask the customer whether he or she would prefer a term insurance plan or an endowment plan?

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