Should I invest in RD or liquid funds to accumulate annual premiums of insurance policies?

I invest around Rs 30,000 in mutual funds via SIP. I also have LIC and SBI life insurance policies with annual premiums. To accumulate these premiums, I invest in a recurring deposit. Should I continue with this RD or should I invest in liquid funds? Please note that I have to pay premiums on stipulated dates and cannot afford negative returns. I don't have any term policy. I have paid 8 premiums of my LIC policy, should i continue with it?
- Soumyadev Bhattacharyya

From your query and the fact that you do not have a term insurance, we understand that you have traditional insurance policies like endowment or ULIP which combine insurance and investment. However, you should keep your insurance need and investments separate. The only kind of life insurance that makes sense is term insurance because only in that case you are buying purely a risk cover. The moment you buy any other kind of insurance which promises a lumpsum repayment at the end of term, you are actually making an investment that is disguised as insurance. Such policies are expensive, provide you with little life cover, and the investment part offers moderate returns despite decades-long lock-in.

We believe that transparency is a key aspect in every kind of financial service, most of all in insurance on which people depend so totally. Malpractices, inefficiency and poor performance in any kind of financial service are almost always rooted in lack of transparency. In this regard, the insurance industry in India just doesn't measure up to the standards that are followed by the mutual fund industry.

The way to go about it is to calculate how much cover you need and then find a good, low-cost, term insurance. The premiums for a term insurance will only be a fraction of the premium that you are paying for your other insurance policies. In our opinion, you should discontinue these insurance policies. You would likely incur losses on surrendering them but its better to book them now and re-organize your investments.

This article was originally published on March 07, 2017.