Tuesday, March 13, 2012
LIFE INSURANCE- AS IT OUGHT TO BE..
(If you are lucky enough to be a US citizen, you should explore this option for estate planning) This article appears in the latest issue of Moneylife (www.moneylife.in) magazine INSURANCE- AT LAST........ It is good to see a host of life insurance companies actually ‘advertising’ their insurance products. So far, their high decibel and celebrity starring advertisements were used to shove investment products down the throats of gullible investors. Right from pushing insurance for children (an investment product with high commissions supposedly meant to create a corpus for education and/or marriage, the basic product of ‘life insurance’ or pure term policies were kept hidden from the investors. IRDA, the regulator cum trade body of the insurance industry has been a genuine supporter of the industry, unlike AMFI which has been undergoing an identity crisis over the last decade or so. Finally, Religare insurance let the cat out of the bag by launching a product by passing the agents and offering a pure term policy at a very affordable price. It is heartening to see this product being pushed actively by companies like ICICI and HDFC Life. This is perhaps the only insurance policy that a person needs. This is a pure cover that pays out a known sum of money to the dependants in the event of the insured passing away before he/she could have fulfilled financial obligations. To get this comfort, one pays an annual cost. This is very much like medical insurance. So far, even when you ask the agent about such a policy, he typically dissuades you by saying “But Sir, you do not get anything back” and why don’t you look at something else. Commissions on this product are very low, so the agent naturally gravitated towards selling of investment products. Do not worry about getting ‘money’ back when it comes to life insurance. Does anyone look at getting money back when taking house insurance? Or does a corporate look at money back when insuring their assets? Life insurance is expenditure. However, the pure term policies can be improved. Some of them offer cover only for thirty years. Of course, if we start this age 20 or 25, by the time the thirty years are over, we should have overcome the continuing need for it, if we have done financially well. Today, most people start their working lives after age 25 and marriages tend to happen after thirty. So, by the time their children are through with their education, the earning members could well be in their late fifties or early sixties. Thus, one may have to rework a term policy, once additional dependants get tagged on. It would mean discontinuing the old one and taking a new one. Of course, the annual outlay would go up since the new policy would start at a higher age. I have seen a policy from LIC ( I am sure some other companies also have such policies) which gives cover till age 80 and a guaranteed payout at that age or death (whichever is earlier). I am sure the premium for this is higher, but the advantage of this is that it can give you some way to plan an estate for your children / dependants. Ideally, one would like a policy which covers you to death and offers a guaranteed payout to the nominee / assignee / beneficiary ONLY on death. This is ideal for estate planning. In one of my very early articles(February 1, 2007 MoneyLife) , I had talked about this kind of policies being ‘tradable”. This means that if I have such a life policy, I can actually sell it off to an investor at any stage, at a negotiated price. The investor would have to take a call on my likely longevity, estimate a return on his money for the period the money is locked in (till he gets the final payout on my demise) and arrive at a price to pay now. This kind of an instrument would be fantastic. I would be able to sell this policy at a stage in life where I can provide for myself to battle inflation and a few uncertainties in life. If I am single and thanks to modern medicine I live beyond my useful shelf life after my income stream has dried up, this kind of a policy can come to my rescue. This kind of a ‘tradable life policy’ (TLP) is common in many parts of the world and meets a genuine need. It also provides a Triple A rated investment opportunity (the only difference being that the time of payout is uncertain) for those who do not mind the morbidity factor associated with this investment. (If I were an investor, I would perhaps be praying for early death of all my subjects covered by the policies I hold). This factor apart, tradability provides an essential and useful feature to the insured, helping him to face the uncertainties of prolonged existence and without depending on a third party. I hope IRDA will bring this about and the ministry of finance will encourage this by enabling favourable tax treatment and creating the required framework to legally enable this. Life insurance is serious business. Let us not mix it with investments. And IRDA can help by guiding the insurance companies to sell pure life and perhaps sell the investment cum insurance products through the mutual fund vehicles. That will truly put things in their proper perspective. I only wonder if the regulators have the courage to look at the interests of the public at large, who help the industries thrive.