Tuesday, June 3, 2014

LIFE INSURANCE- Do you need it? And when to buy? When to stop-


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.


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