OF LIFE INSURANCE AND SUNSET YEARS

(this appears in a recent issue of Moneylife)

How much are we willing to pay as a charge, in order to provide for our family? What is it that we really want, is something fatal were to happen to us? How much of a role does money play in this? These are difficult to quantify, I guess. Of course, there are many possibilities of calculating numbers to come to some conclusion.
First, if something were to happen to me, whether money is needed or not depends on whether I have financial dependants. If I do not have anyone whose day to day living is materially impacted, there is no pressing need for me to leave behind a source of income. However, if I do have someone who is dependant, then I have to make sure that I provide for the people who depend on me, as if I was around. To calculate this is a tough ask, since it involves future needs, aspirations etc of the surviving dependants. We all easily understand this as the need for a life cover or life insurance.
As we progress in life, our aspirations tend to normally go higher. Similarly, our income levels also tend to go up with time. At the same time, with each passing year, our need to provide a cushion for our dependants should decrease under normal circumstances (with more savings and commitments on children getting nearer to extinction) . So, if we do well in life, we would hopefully reach a stage, where our dependants are financially secure. For example, if one gets married at 30, has children in three to five years, by the time the person is 55, he would have provided for most of the needs of the children. He may also have had some savings / investments that take care of needs. So, with age, given normal earning cycles, the need for life insurance should decline and at some point, it should be zero. Of course, we can always argue that why not leave behind as much wealth as possible.
The issue here then boils down to two key things:
i) I need a life cover up to some stage in life; and
ii) I need to accumulate wealth and leave behind as much wealth as I can.
Often, we tend to mix up both our goals. For example, we are willing to pay a fixed amount every year to cover the loss of our vehicles or to meet any major unforeseen medical expenses (hospitalisation, surgery etc). We are even willing to pay an annual premium to insure our home and property. However, when it comes to life insurance, we think very differently. In all the cases other than life, we are willing to treat the amount spent on insurance as expenditure. We do not look at the returns etc., We look at the value covered and the lowest possible outgo.
Life insurance is no different. Why do we mix up investment in this? We get taken in when the seller of insurance tells us “ If you want a pure term policy, fine with me. However, if you want some money back, why do you not look at...?”
One interesting product to buy for life insurance is a ‘return of money’ policy. In other words, a definite sum of money is paid to the nominee/legal heirs on death of the insured. This can be a low premium product, fixed cover, no participation, riders etc., This is an interesting policy in today’s times. It is very likely that as we grow old, we will be left to fend for ourselves. By choice, we may not want to impose on our children, leave aside the fact that we may be inconvenient for them. In such a case, perhaps the best option is a genuine ‘Reverse Mortgage’ on the home we own and soon to become worthless as we near our expiry dates. A pure ‘Reverse Mortgage’ would be one where the lender or the provider of the mortgage takes a fixed call, without recourse. In other words, he takes all the risk of the market price in future. This is perfect because it makes sure that we consume our assets in our lifetime and do not leave a mess for our heirs.
In the same context, if we had a life policy with a definite payout only on death, we could perhaps sell the policy. In an article (more than a year or two ago) I had mentioned about how such a policy could be a great thing for a secondary market buyer. Imagine that I am near about 80 and have an insurance policy with a sure payout of Rs.50 lakh, on my death. I can sell it to someone for Rs.40 lakh or so. The buyer will look at two things- How long I could live and the return on his investment. The longer I live, the lower his returns. And I will get some money in my lifetime out of this policy! This should be a tradable policy.