The bundling of products is not a new phenomenon. The earliest we probably remember is getting a toothbrush free with toothpaste. Now one can argue on both sides - every customer who needs toothpaste, also needs a toothbrush, so it makes sense. On the other hand, the company which is making toothpaste is good at making a medicinal formulation that helps clean and fortify the teeth, on the other hand, a toothbrush is something that should be sold by someone who is a manufacturer of plastic goods, like say any other brush or even a comb.
Combos continue even today, even in the financial services space. Credit card companies provide airport lounge membership for frequent travellers, most of them even provide accident insurance.
The focus of any combo product is to bundle two different but complimenting products that are usually required by the same audience together.
For instance, say a young customer who has recently started earning has two financial needs a) to securely invest his savings to beat inflation and b) to insulate himself and his family from financial risks.
Life insurance companies have been experts in long-term investments - managing and investing funds for the long term. Along with this, they are also professionals in calculating and covering financial risk in exchange for premiums.
Investment products are bundled products that bundle and solve both these needs with a single product.
Advantages of insurance + investment bundled products:
Solves two problems efficiently:
A life insurance investment product offers an ROI against the long-term periodic investment made by the customer. At the same time, it financially secures the family in case the customer passes away during the tenure. In effect, it is a solution with an inbuilt backup solving for inherent risk in any plan that requires periodic investment.
Secure customers who are not oriented to risk management:
India as a population does not get an education on personal finance or risk management when they are young. Customers hence usually do not understand the counter-intuitive strategy of paying a risk premium to cover a large risk. The inherent bias of immediate loss vs future gain, ensures customers do not believe in pure risk or insurance products. With such bundled products, the investor’s family gets financial security without resistance from the investor.
Investments in insurance products are eligible for tax benefits in form of deductions us 80C during investments. Unlike other investment products, the returns generated from a life insurance investment product do not attract any capital gain taxes and are completely tax-free.
Disadvantages of insurance + investment products you should be aware of:
Confusing investment as insurance:
When buying such plans it should be clear that the customer is buying an investment plan bundled with a certain insurance cover. The entire plan should not be considered to be a mechanism to financially secure your family. For financially securing the family, a larger cover may be required than what is offered in such bundled products. One should explore a term plan as an appropriate product in such scenarios
Difficult to calculate returns:
People invest to earn returns that beat inflation. Since this product is a blend of insurance and investment, a quick calculation of the returns on investment and comparing it with other options can be extremely difficult - especially for products that have participating bonuses as an offering.
The focus in most products is the return of capital:
Most of these products, apart from ULIPs are focussed on return on capital than the return of capital. They thus do not generate enough returns. Like any other investment product, one should evaluate the returns on the product, and compare them with other options before making the decision to invest.
These products come with long-term financial commitments, both in form of minimum years of premium payment, as well as minimum years you need to stay invested. If you aren’t aware of these commitments before you buy the product, and you decide to drop off in the middle of the plan, you attract significant deductions and loss of investment in the product.
As you can see the problem is not with the construct of the savings products sold by insurance companies nor is it about mixing insurance and investment. It is about buying the wrong product that does not match your needs. For instance, Buying a wrong investment product that promises the highest returns looks good, but if it does not match the needs of the customer - for instance, this customer had a low-risk appetite, and didn’t want to risk the capital for earning aggressive returns, then the product is a wrong/unsuitable investment for this customer.
The only thing that you must do is cut the noise around you and focus on articulating, evaluating, measuring your financial needs and requirements, and defining your constraints (in the form of, say, risk appetite etc.).
Once you have clarity of what you want - you can simply read through the product, and its key terms and conditions and see if it matches your needs.
A product that many may generalize is bad, but matches your needs is a good product for you. A product that many may generalize is good, but does not match your needs is a bad product for you.