Life insurance endowment is a wonderful product. Unfortunately it has come in for a lot of criticism and the general perception is that it is a low return product. It is compared to mutual funds which are seen as higher return products. The criticism is from people who understand little or nothing of an individual’s investment decision making process.
An expected higher return means higher risks
If a financial product offers a higher return in simple terms it means it carries a higher risk. A higher risk means that the investor may or may not get the higher returns. Hence a product that has a possibility of earning 12 % in today’s market conditions (where the banks offer 6 %, approximately) means that the risk of the 12 % return product is very very high.
An investor is concerned more about investment risks rather than investment returns
For an investor (especially individuals) the assessment should be of the risk in the investment and not the potential returns. Returns are uncertain, risks are certain. Whether or not an investor will earn 12 % is uncertain. The investor may or may not earn the promised 12 %. But what is certain is that the 12 % investment product carries a very high risk as compared to a low risk product like bank fixed deposits or life insurance endowment.
Investment in high risks result in losses when the markets are falling
So we should be concerned about risks and not about returns. When we look at investments from a risk angle (and not a return angle) some very interesting things surface. Consider for example that an investor has invested money only in high risk investments such as shares and mutual funds.
Table 1: Portfolio with only high risk investments in a falling market
| Investment | Expected Rate of Return | Actual rate of return after 1 year |
| Share A | 20 % | 8 % |
| Share B | 15 % | 7 % |
| MF Equity Fund | 12 % | 6 % |
| Portfolio returns (Average) | 15.66 % | 7 % |
From Table 1 we can see that in a falling market the investor earned 7 % while the expectation was 15.66 %. The share market and the other financial markets did not perform as well as was expected by the investor.
Investments in low risk investments protect the investment portfolio
But supposing the investor had invested some of his or her money in low risk investments also, such as bank deposits, post office deposit and life insurance endowment, the picture of earning on the portfolio would have been very different. In all cases (Bank and post office deposits and life insurance endowment) would have earned the rate of return as promised or expected at the beginning of the year. While the investments in shares and mutual funds would have earned lesser, since the markets were falling.
As a result of the combination of the above factors the overall return on the portfolio would have been 7.4 % and not 7 % as was the case earlier, as shown in Table 2.
Table 2: Portfolio with BOTH High and Low risk investments in a falling market
| Investment | Expected Rate of Return | Actual rate of return after 1 year |
| Share A | 20 % | 8 % |
| Share B | 15 % | 7 % |
| MF Equity Fund | 12 % | 6 % |
| Bank deposit | 7.5 % | 7.5 % |
| Post office | 8.4 % | 8.4 % |
| Life Insurance | 7.5 % | 7.5 % |
| Portfolio returns (Average) | 11.33 % | 7.4 % |
Life insurance endowment protects the investment portfolio from downside risks
From the hypothetical calculation above we can see that low risk investments “protect” an investor’s investment portfolio when the markets are falling. This is one of the chief reasons one must have a substantial part of our investments in low risk investments. In the language of financial management, investments in low risk investments help in downside risk management.
All the more important to invest substantially in low risk investments when the markets are volatile.
In markets that are volatile (where the market prices move up and down frequently, downside risk management is an essential part of overall prudent financial planning. As shown in the article And the Tortoise Wins in this blog, volatility kills profits. Higher the volatility, higher the losses made, especially the investment is held for a long period of time. Every investment portfolio should have a substantial percentage of low risk investments, which ensures that the investor’s money is protected against the many risks of financial markets.
For Long Term Needs life insurance endowment is the only safe and sound option
It is for this reason that long term investments (such as for long term needs: higher education, marriage and retirement planning) should be made only in low risk investments. Life insurance endowment is a long term, low risk, low liquidity product most suitable for long term needs and long term financial planning.
Life insurance endowment – The Three In One Product
Life insurance endowment not only protects the family from the untimely death of the bread earner, and also from the policy holder surviving to a ripe old age; it also protects the policy holder’s investor from the risks of the financial markets. There is no other financial product that does all three things at the same time. Which is why we say
Sell Risks Not Returns