USING LIFE INSURANCE TO LIVE

Life insurance is a much debated and discussed topic. Most people get pushed in to buying investment products (like endowment or money-back or some such name) as the agent tries to maximise his commission from the annual premium he can extract out of you. In my last column, we had discussed about an insurance company offering a “whole life” policy for a crore of rupees, at an annual premium of just Rs.8600/- for a 25 year old male (be sure to read the fine print for exclusions, inclusions etc).

This is insurance as it ought to be. We want someone to be provided should something happen to the bread winner. When a non-earning spouse or a child passes away, sure there is grief, but there is no financial distress or loss of income. So, the key thing is to ensure that the earning member has a cover that will provide for the dependants in the event of demise (of the earning member).

The policies that provide for payouts only in the event of death can be used in several ways. One is to provide an estate for your dependants. In which case, assuming you have taken the policy at a young age, you will keep changing the names of nominee a couple of times, or leave a will which clearly states that the proceeds of the policy will accrue to the person chosen by you. Remember that a nomination is a mere appointment of a kind of a trustee to collect the proceeds and hand it over to the legal heirs.

There is another fantastic thing that can be done with the whole life policies. Most such policies have payouts either on death or after a particular age (say, eighty).  Today, people may give up having to work for a living, at age sixty or thereabouts. This means that we have to survive for a couple of decades or more, on the basis of our savings and investments made in our working period. Of course, people argue that they will live off their children. This is becoming less and less possible due to changing lifestyles and changes in attitudes. Hence, all of us would like to have our financial freedom.

Here, we have a whole life policy with a payout after eighty or after death. Is there a way where we can enjoy it earlier during our lifetime? Worldwide, it is possible to do so. What we have to do is to “sell” or “assign” the policy to an investor or a lender. He buys it and takes the risk on the longevity of the insured. Let us assume that there is a whole life policy with a payout of a crore of rupees when the insured turns eighty. And let us assume that the annual premium is Rs.40,000/-. Now, the insured, who is seventy, can go and ‘sell’ the policy to the investor at a price. The person who buys the policy, will get the sum of one crore rupees, when the insured turns eighty (ten years to go) or on the death of the insured, should it happen before he turns eighty. So, the investor is betting on a sure fire crore of rupees at the end of the tenth year and his annual outgo will be the premium amount (since he has bought the policy, he will pay the premium to ensure its continuance). Assuming an interest rate of around eight or nine percent per annum, the investor might offer to buy off the policy at an amount of anything between forty and fifty lakh which he will pay the insured, ten years before his eightieth birthday.

This is fantastic for the seventy year old guy, who now has a corpus of money to help him live a better life. At the same time, the investor has virtually got a triple” A” investment. Of course, the investor returns would vary depending on when the event forcing payout happens. For example, if the insured dies at 75 and the payout was at death or 80 (whichever comes first), the investor makes a bumper return.  Here I will banish the morbid thought that the investor will be praying for the early death of the insured.

These are called “TRADED LIFE POLICIES” and are popular in the west. This is also a great investment instrument. We may need to tweek some rules here and there, but there is nothing wrong with this. Such an instrument would give a lot of relief to the insured also.

Such an instrument or a facility is absolutely required in a changing society, where parents do not want be financially dependent on their kids. This is also a great investment instrument.  Of course, today the banks can lend against insurance policies and some bank could actually launch this product. With banks like HDFC associated with life insurance companies, they can easily launch this kind of a product. To start with, they can give loans against policies that have guaranteed payouts when the insured reaches a ‘fixed age’ rather than death. The death part can be left to private enterprise. For the banks, it is risk free lending (the sole risk being the claims paying ability of the insurance company) and for the insured, a way to improve their life.