Imagine you want to invest 1 Lakh every year in a bank using a simple fixed deposit or recurring deposit (FD/RD).

When you speak to the bank manager, they inform you that to receive a return of 5-6%, you must keep your money invested for a full 25 years. If for any reason you decide to withdraw your money before 25 years, the bank will impose a penalty on your principal amount and return only the remaining balance.

If you choose to withdraw in the first two years, you’ll receive only 25-35% of your initial investment, with no returns. If you wait and withdraw between the 5th and 10th year, you’ll get back around 60-70% of what you invested. If you wait until between the 15th and 20th years, you might receive your entire premium back. The bank manager emphasizes that only by keeping your money in the investment for the full 25 years will you earn the 5-6% returns.

But there’s a catch: the manager cannot guarantee that these returns will remain fixed. If the bank’s annual bonuses decrease, your returns could drop to 4% or even 3%.

Considering these conditions, would you want to invest 1 Lakh per year in this bank’s fixed or recurring deposit (FD/RD)?

If your answer is yes, then you can invest in traditional insurance policies like moneyback, endowment plans or whole life policies. If your answer is no, that is why insurance should not be viewed as an investment.

Insurance agents often promote the idea that your family will receive 20 Lakhs if you die. However, for that same 20 Lakhs coverage, you could buy term insurance for just around 3,000 rupees a year. Then why pay 1 Lakh in premiums for the same coverage?

This brings us to the third lesson in financial planning: you cannot have the best of both worlds when mixing investment returns with insurance coverage.

Instead, you often end up with the worst of both worlds—receiving lower returns and inadequate life cover if you treat insurance as an investment product.

Lesson 3: Insurance as an investment products is normally a bad decision.