Investing instead of insuring? How it may cost you

Adhil ShettyBankBazaar.comA life or health insurance is often sold and not bought. The optimists among investors would consider the money on insurance premium to be dead capital as there are no or very less returns from it. Yet others consider insurance as an investment tool and choose plans that project maximum returns.While being optimistic is commendable, is it really a wise step to completely exclude insurance from your financial planning portfolio? Let us take the case of Aman. The 25-year-old was one such investor who considered paying premiums to be worthless. He was offered a premium health insurance plan with sum insured Rs. 5 lakhs at a premium payment of Rs. 12000 per annum.Being young, healthy, and optimistic, he considered it less likely for any health issues or misfortunes to befall him in the near future. As he had a long time ahead of him to invest and build a corpus, he dismissed the insurance option and considered having a separate contingency pool instead as it would fetch him returns in addition to being a buffer for emergencies.But was this really a good move?Let us see with the help of a couple of illustrations. Medical emergencies can befall us at any time. Your ability to handle such emergencies from a financial perspective would hinge a lot on your approach to purchasing insurance versus investing, which in turn would determine your financial position when the emergency hits you.Scenario 1Aman decided to invest Rs. 12,000—the premium amount that he would have paid had he taken the health insurance plan—in an MF through SIP mode with a monthly payment Rs. 1,000. Expecting 14% returns annually on an average from this, he decided to keep this as a contingency fund. The annual investment would be Rs.12,000 and the total amount invested in 20 years would be 2.4 lakhs. At 14% per annum, the fund would grow to Rs. 13 lakhs after 20 years, an appreciation of Rs. 10.6 lakhs.Now assume that Aman faces a medical emergency in the 12th year, with the expenses running up to Rs. 5 lakhs. By the 12th year, he would have invested total Rs. 1.44 lakhs and his investment would have appreciated to Rs. 3.7 lakhs. He uses this contingency fund for meeting his medical expenses. This means that not only does he exhaust his investment, but also will have to shell out an additional amount of Rs. 1.3 lakhs from his other savings for this.Therefore, his total outgo is Rs. 5 lakhs. Additionally, he falls short of his investment target of Rs 13 lakhs by Rs. 9.3 lakhs.If Aman had taken up the offer of health insurance and had invested the Rs. 12000 in the health insurance plan instead of in the MF, he could have covered the sudden medical expense of Rs. 5 lakhs that he incurs in the 12th year and that too by incurring a much lower cost for that.This is so because with an annual premium of Rs. 12000, his total outgo would have been just Rs. 1.44 lakhs by the 12th year, yet would have a health cover of Rs. 5 lakhs that would cover the medical emergency. This represents a saving of Rs. 3.56 lakhs as compared to the investment option.Additionally, he would also get tax savings for the health insurance premium payment.Scenario 2Assume Aman’s family meets with a medical emergency at the 20th year. By then, medical costs would have inflated, making medical bills costlier. Suppose he or his family incurs medical expenses of Rs. 15 lakh due to this emergency.His contingency corpus, which have grown by then to Rs. 13 lakh, would be insufficient. He would have to bear an additional amount of Rs. 2 lakh from his pocket to meet the requirement. On the other hand, if he had taken the health insurance plan at a premium payment of Rs.12,000, and assuming his insurer has increased his sum insured by 100% due to no claims, he would get a coverage of Rs. 10 lakhs, by paying a premium of just Rs. 2.4 lakhs over 20 years.He would then have to address this difference of Rs. 5 lakh between the medical expense requirement of Rs. 15 lakh and the health insurance coverage of Rs. 10 lakh by paying from his own pocket.Aman’s total outgo in this case would be Rs. 7.4 lakh—premium payment of Rs. 2.4 lakh plus Rs. 5 lakh from his own pocket. This represents a saving of Rs. 7.6 lakh as compared to the investment option.Additionally, he would benefit from the tax savings on the yearly insurance premium payments.Balancing insurance and investmentWith a cash corpus, you have the flexibility to use the money as and when needed. Also, you are not bound by the insurance terms and conditions. However, insurance is a dedicated investment tool that needs to coexist with investment options in your financial plan.It is true that with a contingency fund, you can use the money irrespective of needs, and with no conditions, whereas in an insurance you are bound by conditions like purpose, hospital or treatment you choose. For example, you cannot get insurance for cosmetic treatments. But escalating medical costs means that you would require a dedicated fund that could aid you in case of any unforeseen medical expenses. Therefore, the mantra is to balance and safeguard your investments with life and health insurance. Opting one over the other may just bring you to your knees—literally and financially. Also, remember never to completely exclude insurance from your financial planning portfolio.