(This article appears in today's Asian Age/Deccan Chronicle)
INSURANCE IS NOT INVESTMENT..
The IRDA finally seems to be telling the insurance companies to be more modest about what they should charge as commission or fees from the money that they collect as premium. It may not go beyond this. Of course, they are also imposing ‘fines’ on some companies for paying higher commissions or for delay or denial of claims.
The biggest problem with the life insurance companies is that they hardly sell pure life insurance. In the guise of life insurance, they focus more on selling a combination of investment and insurance. Whilst I do not know about the reasonableness or otherwise of the life insurance cover charges, I can say with assurance that the investment products are unhealthy for the customers. The fees and the administrative charges etc amount to more than what a mutual fund or an ETF would charge you. And there is no reason to believe that the insurance companies deliver superior investment performance as compared to the mutual funds.
If you have invested in ULIPs you will know about the issues. The insurance companies will only mention the performance with respect to amount invested by them and never on the money that you have shelled out. Even your friendly agent will not tell you what the returns on your own outgo are. There is absolute opacity in the way insurance companies do business.
My view is that if at all one has to consider insurance, there are only two sorts of insurance. One is medical insurance and the other is pure life insurance. Both are expenditures and not investments. Do not look for returns. Often, the insurance agent will con you in to buying an investment product, by saying that you will get your money back. Do not fall in to the trap. It is like saying that I will return your money after thirty years, but do not ask me for interest.
We see many online advertisements that keep shouting things like “only Rs.600 per month” or some such figure for a one crore life cover. Of course, there will be an asterisk etc so the actual number may come a bit higher. These kind of pure life policies are the best for an individual. Of course, if you have a lot of money and do not have to worry about what happens to your dependents financially after your death, then do not waste money on life insurance. After all, more people live beyond sixty than those who die before this age. So, the odds are in your favour in any case.
Take a term policy that gives you life cover, say, till age 50 or 55. By that time, you should have been able to provide for your dependents. If not, it is unlikely you will provide anything more in the few years of earning that you may have. So, around that age, you should stop the expenditure on the life insurance business. Starting early is good, because it locks you in to a lower outgo. The older you are, the higher is the premium for the same value of risk covered.
Insurance has to be a rational choice and not an emotional one. The biggest scam going around is ‘children’s policies’. Under normal circumstances, children will live beyond you. Second, if your child were to pass away unfortunately, there is no adverse financial impact on you. So, why do you insure your child? Now, your agent will tell you that the ‘policy’ will pay for education or marriage etc of the child. You have now got in to the realm of investment. Here, the insurance company is not as efficient as a mutual fund. So, invest the same amount in any mutual fund. You ask the agent about the rate of return on the amount you are expected to fork out every month/quarter etc and you will find that it has to be lower than a bank fixed deposit rate or any mutual fund investment. AVOID CHILDRENS INSURANCE POLICIES.
If at all you do take a life insurance policy, ensure that you discontinue it once your dependents are financially secure or you have provided enough for them.
I would have recommended a full life policy with payment of sum assured on death, provided there was a secondary market for trading in them. You could take the policy and sell it off in your sunset years to someone who will get the sum assured on your death. You could sell it at a discount and enjoy the money. Of course, you could buy such a policy if you want to leave behind a sum for your dependent. In such a case, make sure that your will mentions about who will / should get the insurance proceeds. Mere nomination is not enough, because the nominee merely is an agent to receive the money and it rightfully belongs to your legal heirs.
Life insurance is a morbid topic and often agents play upon your emotions to sell you products that make no financial sense. Take some time before you commit in to anything long term. Take a piece of paper and do your homework. If in doubt, talk to others.