How to Evaluate Insurance-Cum-Investment Products

Rohit is being sold a plan, not a product

Rohit married last year, which appears to have placed him on a list. He has been offered the same broad thing three times: a policy that provides life cover and builds a corpus and has a tax benefit, presented as the sensible grown-up choice for somebody starting a family.

Nobody has done anything improper. The product is real, the documents disclose the charges, and the person selling it may well believe it is a good idea.

The question Rohit needs is not whether it is a good product. It is whether it is a better way to get life cover and investment growth than buying those two things separately — because that is what he is choosing between, whether or not the conversation is framed that way.

The comparison that settles it

Any bundled product can be assessed the same way. Work out what it costs, and what the same two jobs would cost separately.

Take the annual premium. Establish the sum assured — the life cover — and get a quote for pure term insurance for the same cover, the same term, for somebody Rohit's age and health. Subtract the term premium from the bundled premium. What remains is the amount being invested on his behalf.

Then ask what that remaining amount, invested in a simple diversified fund for the same period, would produce compared with what the policy projects. Both sides after charges and after tax.

That is the whole analysis, and it takes about twenty minutes. The reason it is not offered in the sales conversation is that it is usually decisive, and rarely in the product's favour.

Why the bundle tends to lose

Three structural reasons, none of which requires anybody to be acting in bad faith.

The charges are higher and less visible. A bundled product carries costs for mortality, policy administration, fund management and often allocation, deducted in ways that are disclosed but hard to total. A term policy has one premium and an index fund has one expense ratio, and both can be compared on a page.

The cover is usually small relative to the premium. Because most of the money is going into the investment component, the sum assured on a bundled product is frequently a fraction of what the same premium would buy as pure term cover. Rohit would discover this immediately if he ran the comparison above, and it is the single most common finding.

And the commitment is long and expensive to exit. Bundled products typically penalise early surrender heavily, so a decision that turns out to be wrong in year three costs a substantial part of what has been paid in. A term policy can be stopped, and a mutual fund can be sold.

There is a fourth reason that is about behaviour rather than structure: the bundling makes it impossible to assess either half. Rohit cannot tell whether the cover is adequate or the investment is performing, because the product reports one number.

The arguments made for them, assessed honestly

Forced discipline is the strongest. A product you must pay into does get paid into, and somebody who would otherwise not invest may genuinely end up better off. That is a real effect and it is worth weighing — though a standing instruction into a fund achieves the same thing without the exit penalty, and the discipline argument is often made on behalf of a client who has not been asked.

Tax treatment is the argument most often deployed and the one to be most careful with. The rules governing what these products receive have changed in India in recent years and depend on the premium, the sum assured and the type of policy. The current position is worth checking against a primary source rather than accepting the sales material's account, and a tax benefit on a product that returns less is not automatically a better outcome — the comparison has to be run after tax on both sides, which is the point of doing it properly.

Guaranteed returns are the argument to treat as a stopping point rather than a feature. Where a guarantee genuinely exists it is narrow, defined in the contract, and usually much less generous than the number being discussed. Ask which clause creates it and who is obliged to honour it, as recognising mis-selling sets out.

Where a bundled product can be reasonable

Naming these is fairer than pretending they do not exist.

Where somebody genuinely cannot or will not invest separately, and the alternative is nothing at all. Where a specific guaranteed payout at a specific date serves a specific purpose that a market-linked investment cannot. And where the tax position, checked properly rather than asserted, genuinely favours it for that person's circumstances.

Those are narrower than the frequency with which these products are sold.

If Rohit already holds one

The decision to exit is separate from the decision to have bought, and it needs its own arithmetic rather than being made in irritation.

Surrendering some products crystallises the worst of the loss, and the right answer is occasionally to keep a poor product rather than pay to leave it — particularly where most of the front-loaded charges have already been taken and the remaining years are cheaper. Measuring the return and exit cost of a policy sets out how to work that out on his own numbers.

What holds regardless is the need for the term cover itself, since a bundled product kept for arithmetic reasons is very unlikely to be providing enough of it.

What to take away

Assess a bundled product by unbundling it: subtract the cost of equivalent term cover from the premium, and compare what is left against the same amount invested simply, after charges and after tax on both sides.

The bundle usually loses on cover per rupee, on visible costs, and on the price of getting out. The discipline argument is real and is better solved by a standing instruction. And treat any guaranteed return as a question about which clause and which entity, rather than as a feature.