INSURANCE – CIA I

IS LIFE INSURANCE A GOOD INVESTMENT?

SUBMITTED BY:

Meenu Maria Mathew

II MBA – B(FINANCE)

Reg no: 0920139

DOS:29/09/2010
INVESTMENT ATTRIBUTES

The attributes that an investor looks into before making an investment decision are Return,
Risk, Liquidity, Tax Shelter and Convenience.

VARIOUS INVESTMENT OPTIONS

The various investment options are

• Equity Gold, silver

• Commodities Real estate

• Life insurance policies Derivatives

• Fixed income securities Mutual funds

• Private equity Venture capital

INTRODUCTION TO LIFE INSURANCE

Life insurance or life assurance is a contract between the insurer and the policy owner
whereby a benefit is paid to the designated beneficiaries if an insured event occurs which is
covered by the policy.

Insured events that may be covered include:

• Serious illness : Life policies are legal contracts and the terms of the contract describe
the limitations of the insured events. Specific exclusions are often written into the
contract to limit the liability of the insurer; for example claims relating to suicide, fraud,
war, riot and civil commotion.

Life-based contracts tend to fall into two major categories:

• Protection policies - designed to provide a benefit in the event of specified event,

typically a lump sum payment. A common form of this design is term insurance.
 • Investment policies - where the main objective is to facilitate the growth of capital by
regular or single premiums. Common forms (in the US anyway) are whole life, universal
life and variable life policies

Unique Characteristics of Life Insurance

Life insurance is a risk- pooling plan, an economic device through which the risk of premature
death is transferred from the individual to the group. However the contingency insured against
has certain characteristics that make it unique; as a result ,the contract insuring against the
contingency is different in many respects from the other types of insurance. The event insured
against is an eventual certainty. Life insurance doesn’t violate the requirements of an insurable
risk, for it is not the possibility of death that is insured, but rather ultimately death.The risk of
life insurance is not whether the individual is going to die,but when,and the risk increases from
year to year.The chance of loss under a life insurance contract is greater in the second year of the
contract ,as far as the company is concerned,than it was in the first year,and so on,until the
insured eventually dies.Yet through the mechanism of law of large numbers,the insurance
company can promise to pay a specified amount to the beneficiary no matter when death comes.

There is no possibility of partial loss in life insurance as there is in the case of property and
liability insurance. Therefore, all policies are cash payment policies. In the event that a loss
occurs ,the company will pay the face amount of the policy.

LIFE INSURANCE AS AN INVESTMENT

The long ranging controversy between the proponents of permanent insurance as an investment
and the advocates of insurance for the sake of protection will probably be never settled.In fact,
the assertion that any investment is ’good’ or ‘poor’ rests on a variety of unstated assumptions
that may or may not hold true for a particular set of circumstances.
  The first feature that supports life insurance as an investment is the compulsion it
entails.Many people do not have the self-discipline and determination required to follow
through with their plans for the regular communication of a savings fund.Once a policy is
taken out,an individual usually will pay the premiums rather than deprive the family of
the protection the policy gives,and paying the premiums means making regular
contributions to the savings elements of the contract.Frankly,this argument is not
particularly compelling.

 Another advantage of life insurance as an investment is that it enjoys tax advantages

that some other forms do not enjoy.First,the increments in the cash value are not taxable
until actually received by the insured.at the time the policy is surrendered,the excess of
the cash surrender value over the premium paid is taxable as ordinary income.Also the
insured is permitted to deduct the total amount of premiums paid,which includes the cost
of protection,in computing the gain.

 Finally there is a safety of principal not found in certain other investments.The major
criticism usually leveled at life insurance as an investment is the relatively low rate of
return-usually between 6 and 8 percent .Common stocks are riskier and the investor may
suffer losses.Traditional life insurance cash values are a guaranteed form of
investment,with safety of principal and guaranteed minimum rate of return.In
addition,the newer interest –sensitive policies make it possible to realize significantly
higher returns than those guaranteed in the policy.Finally,for the investor who prefers
the appreciation potential of the common stocks,variable life insurance offers the same
tax-deferral as traditional cash value life insurance.

If the life insurance is to be considered as an investment,it should be LONG-TERM.

The most appealing feature of life insurance as an investment is its complementary functions of
providing protection against premature death at the same time it provides an accumulation that
may be used if the individual doesn’t die prematurely. If the individual has no need for
protection against premature death, it is unlikely that life insurance will match the other
investment alternatives.
At the risk of over simplification, the premium for cash-value life insurance covers three things

1.The first part goes to pay the death benefits for those members of the group who die

2.The second part goes to pay insurer operating expenses(including agents commission)

3.The third part contributes to the accumulating savings element

The individual who has no need for death protection but purchases life insurance as an
investment incurs cost for death benefits and commissions that are avoided with other
investments.To the extent that life insurance is an attractive investment ,its appeal is based
primarily on its role in simultaneously meeting the diametrically opposed risk of premature death
and superannuation.

CRITICISMS AGAINST LIFE INSURANCE AS AN INVESTMENT

 Expense factor: With respect to the return on life insurance policies ,it should be noted
that they have a relatively high expense component.For many forms of insurance,the
front-end commissions make the returns in the early years negative.

 Impact of inflation:Inflation may seriously erode the value of the dollars contributed,but
this is a legitimate criticism of all fixed –dollar instruments.The future trends in the
economy can have an impact on the value of the policy.If the future economy is marked
by inflation and a rising price level,then traditional cash value life insurance will be less
attractive than those investments that ride the inflationary trend.

CONCLUSION

For many individuals,traditional cash value life insurance may be an attractive and dependable
investment. On the other hand,there are many individuals who are not content with the fixed-
dollar nature of traditional life insurance ,preferring equity investments with their potentially
greater returns.The choice ,however, is a matter of finance rather than of insurance.