SAFE AND SECURE..
Two advertisements I saw on
television, recently, set me thinking. The first one is an ad featuring the
cricketer Yuvraj Singh. It was (to my observation) not selling life insurance
but a wealth plan / product linked to insurance.
The second one was one offering a
“life” cover of a crore of rupees at an annual premium of a mere Rs.8,600/- ! And
you had to do everything yourself. No agents. Of course, an asterisk after the
amount means that you have to read the fine print etc but the message was
clear. Here was a life insurance company, inviting you to bypass the agent and
take a life insurance cover for a nice round sum of a crore of rupees. It
clearly sent home the message that should something happen to you, your nominee
would get the sum.
Life insurance has been a much
abused concept in India. Most insurers have been selling investment products
with a dash of insurance thrown in. In most cases, the amount for investment
would form bulk of the payments and no where would the customer know about how
much the commission payout to the agent would be. The amount that gets invested
is after the agent’s commission gets deducted. The commission can range between
2.5% to 40% of the amount you pay as premium.
Now, the insurance company that
is airing the ad, has dared to sell pure insurance. Use that as a comparison to
evaluate when some agent comes and offers you a ULIP or some such product. Take
the premium for the life cover and then see what is left. If that amount is put
in to a mutual fund (where the total expenses are typically capped at 2.25 to
2.5% of the investment value) you will get a better
return. For, in an insurance investment product like ULIP, in addition to the
agent commission, there are also other expenses that are charged. Assuming that
the fund management skills are not vastly different, you end up being a winner
when you opt for a pure insurance product and mutual fund for investment.
Coming back to the first
advertisement with the sportsman, my first thought was that he is facing a huge
medical expenditure. No life insurance policy is going to give that. For that,
you need medical insurance. It is possible that when you are in employment, you
may have a benevolent employer who picks the tab or has a corporate medical insurance
that takes care of the damages. However, if you are not lucky enough to have a
corporate cover, the only option is to have your own medical insurance (or
mediclaim as it is popularly known). This is an expensive proposition, but we
still go for it. And the amount we pay every year is an expenditure that we
undertake willingly. Yes, we do get a tax break, but it is very likely that
even if the tax break is withdrawn, we will go for it. It is for the
uncertainties in the state of health. To my mind, the advertisement is more a
wake-up call for people who still do not have medical insurance.
Coming back to the other
advertisement, just pause and analyse. The paltry sum of Rs.8600/- (I
understand it is for a normal person of 25 years of age) can provide a crore of
rupees to your family should you die before you have provided for them. I think
that is precisely what life insurance is all about. The insurance company has
managed to slash the premium by approaching the customer directly and the
savings on the agent commission is passed on to you.
Life insurance is important if
you have blood relatives who are financially dependent on you. Of course, if
you do not have anyone who is going to be financially distressed should you
cease to exist, you do not need life insurance. And the beauty of a term plan
like the one advertised is that you can stop the cover when you want it. Let us
say that by age fifty you have managed to provide for your family, got over all
financial obligations towards your children etc then you can just stop paying
the premium.
The key to keeping a low annual
premium is to go for a policy early in life. Do not wait till you get married
or have kids. By then, the annual premium amount would go up. The younger you
are, the lower the premium. Of course,
if you have inherited wealth, you have no need for insurance cover. I exclude
here, those who feel insecure with any number in their bank.
The key thing is to remember that
insurance premium is a small payment for an event that can be financially
demanding. If you mix it with investment, you end up a loser on all counts.
Your insurance cover gets smaller and you do not maximise your investment
returns. Think of medical insurance and life insurance premiums as expenditure.
Both are discretionary spends, but sensible spends. Get smart with your money.
R. Balakrishnan
February 7th, 2012.
T
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