Here is an interesting story.
A person once claimed that life insurance goes against his religious beliefs. This is because, according to him, insurance was like a betting game. Let us say that you have yourself insured at INR 10 lakhs, with an annual premium of just INR 4000. What this meant, according to that man, is that you are willing to bet that you will die this year, and you are paying INR 4000 for the bet. The insurance company, on the other hand, bets that you will not die this year, and is willing to pay you INR 10 lakhs if you do. Should you win the bet, which you, of course, want to, you end up paying the company with the promised money. If you lose, your family gets the money, but this costs you your life!
This game goes on for as long as the term of your policy is supposed to last. This forced the man to finally conclude that a policy which gave him good returns was a better option since he could then view it as an investment.
An insurance policy is not an investment
It is important to get facts right here. An insurance policy is in no way an investment policy. When you invest, you expect to get something from it. But when you opt for life insurance, scenarios change quite a bit.if you do die, your nominee will get something. And if you live, no one will anything. Though this is a raw deal, it is the truth! And that is precisely what life insurance is all about. It is, in fact, about death, and not life!
Most people want to get something out of the money that they have given to the insurance company. This is why they opt for policies that give them something back, even if they live. And in this bargain, they end up giving the cold shoulder to the genuine term insurance policies out there.
Of course, everyone can have their own opinion. But our personal views make us believe that term insurances are the purest, best and cheapest forms of life insurance available.
Let us get to the logic and math behind this assertion.
Take the profile of a 30-year-old male for instance. Let us say he has a life cover of INR 1 crore, with a tenure of 20 years and a premium payment term of ten years. Suppose this man takes part in an endowment insurance plan. Here, in case he passes away, the beneficiary will get the sum assured of INR 1 crore. However, should the man outlive the policy, he would not only get the assured sum of INR 1 crore, but also a bonus at the end of the policy. Let us say that the company pays a simple revisionary bonus of a minimum of 3 percent. However, the man will have to pay an annual premium of INR 12,13,977 for 10 years to get that 1 crore cover for 20 years.
On the other hand, if the man had opted for the basic term policy from the same company, he would just have to pay an annual premium of INR 12,258. The remaining balance of INR 12,13,977 less INR 12,258; which is INR 12,01,719 could have been invested anywhere else.
Suppose he invested INR 1,00,143 (which is 12,01,709 divided by 12) every month for 10 years via a SIP in a multi-cap fund. By the end of 20 years, he would have easily made more than INR 14 crores. This is when the fund gave him annual returns of over 18 percent in the last 20 years.
On the other hand, the endowment plan would have given him just INR 3.14 crore. This would have been the assured sum of 1 crore, the guaranteed bonus of 30 lakhs, and the assumed bonus of 1.84 crores.
It is quite obvious how the separation of investment and insurance needs has made such a big difference!
How do insurance companies operate?
It is important to understand the working of insurance companies to understand this better. The entire amount that you pay to the company is not what is invested. The premium that you pay can be divided into three components. These include the expenses of the company, including the commissions earned by the agent as well as the distribution costs and other expenses. The second part includes the mortality premium, while the last part is what makes the investment amount. Also, the amount which can be invested in equity is just around 8 to 10 percent of the total investment. Thus, it is not wise to expect great returns from an insurance product.
Also, while the money might sound good now, it will be far worth less than what it seems now when you get it. even if you have been promised INR 2 crores 20 years down the lane, if you account for inflation at 6 percent per annum, the amount is just INR 62.36 lakhs in today’s prices.
The problem of getting underinsured
One of the biggest problems when it comes to money-back policies is that though the premium is much higher, you might risk being underinsured.
Let us say you are a 25-year-old female who wants a life cover of INR 1 crore for 30 years. Should you opt for the e-Shield cover, you will have to pay INR 7,934 as a premium every year. Suppose you are not comfortable with this premium getting lost, and therefore you opt for the Smart Swadhan plus scheme. In this case, the premium shoots up to INR 42,600 for the same cover. If you cannot afford to pay this huge amount as premium, you might be tempted to opt for a policy worth INR 50 lakhs for a premium of INR 21,300 every year. In one stroke, you have reduced your life’s financial worth to just half!
When commissions creep in
Every insurance product has its specifications about the commission. As a general trend, however, this commission is the highest in the first year and then decreases for the next three years. Once this period has elapsed, this commission falls even more. thus, in the first year, the agent might get around 15 to 35 % of your premium as commission. This can fall to anything between 5 and 15 percent in the next three years. After that, it will fall between just 2.5 and 7.5 percent.
What this also means is that the higher the premium you pay, the more the benefits the agent is entitled to.
Therefore, never even expect an agent to mention term insurance. He or she will always try to push you to opt for fancier alternatives. Since commissions are his bread and butter, he will try to sell you the policy which benefits him the most.
Secondly, never blindly trust your agent. He or she always has his/her interest in mind, and will, therefore, try best to convince you that you need only a particular product. As they say, life insurance is never bought, but they are always sold. So make sure that you are not blindly sold a policy, but that you buy one!