My friend G met her friend R. G has been working for three years as a civil servant while R currently works as a financial planner. G told me that after her meeting with R, G felt is seriously considering buying a policy which covers 15 years and costs about 300 dollars a month, including some riders.
I told G that 300 dollars a month is a significant commitment and that if she bought a pure protection plan, such as term insurance, it need not cost that much. After a few iteration of the discussions, it appears that G was interested in using the policy to invest her money.
As a person who invests in stocks directly, first I told her that her friend R would benefit most from a protection plan that had a return component. Second, I told her that investing directly in the market would get about the same returns, if done correctly.
Did I exaggerate here, that if we were to invest in the correct manner, we can get better returns than through the returns of an insurance policy?
I do not think so. G herself admitted that she knows that investing though the insurance plan would involve multiple layers of transaction cost. A John Bogle pointed out, it is these costs that eats into the returns from a portfolio. However, G is not confident of investing on her own and possibly such a scheme might enforce discipline.
Well, I guess everyone's approach to investing is different. But I strongly believe that we should not mix protection with investment because it confuses you to the benefit of the sales person. If you want to insure yourself, get a term insurance and the related riders. If you want to invest, use an online brokerage and stick to ordinary stocks. An insurance is a long time commitment and my own experience tells me that even when you realise that the returns are poor, you are averse to quit, because you do not want to realise that loss.