Nirjhar Majumdar
Life insurance, which should be an important element in financial planning, is ironically one of the most misunderstood financial products. As many people think that term insurance is the only product they should buy, let us examine how prudent is this school of thought.
Term insurance offers high risk cover at low cost. A 30-year-old can get an insurance cover of R1 crore under LIC?s Amulya Jeevan-I for a term of 30 years, at an annual premium of R33,000. So, he will be paying about R10 lakh during the term and get nothing if he survives the full term of the policy.
Some people suggest that a customer should take a cover for a limited term of 15 or 20 years. But does that serve the purpose of buying insurance? A man very much needs risk cover at 50 as many of his life?s goals will not be achieved by that time. How many os us are really ready to keep a policy, which does not have any maturity value, in force for 30 years ?
A recent survey shows the policy that lapses the most is term assurance. If a policy lapses due to some reason and the life assured dies, nothing is payable even if he has paid premiums for 15 or 20 years! During a long working life, a lot of things may happen. One may be out of employment for a brief period, or suffer a long illness, or meet with an accident.
Term insurance is cheap only at a very young age. At 40, the tabular premium becomes double of the premium at 30. Premium rates are steeper as age increases to, say, 45 or 50. So, term assurance has to be sold to very young people with a reasonably high degree of insurance mindedness.
Some experts say the ideal solution is to buy a term policy and invest the balance investible amount in equities or mutual funds. They summarily reject any insurance product other than term assurance. While equities or MFs can fetch very attractive returns, they are also subject to various external factors.
Benefits of endowment and whole life products
Returns from traditional insurance products are in the range of 6-7%. But keep in mind that a portion of it is used for covering risk. If we deduct the portion of premium going for covering the life risk and calculate the return on the balance portion, the return is much higher than 6-7%. The return will be even higher if we take into account the taxes saved. Finally, there may be very little difference in the returns of traditional insurance products and a combination of term assurance/mutual funds.
Endowment assurance and whole life assurance are always useful. One may not get very high returns, but can surely get a stable one, in addition to a decent risk cover. In India, people like to save for children?s higher education, daughter?s marriage, post-retirement years, etc. Term assurance cannot be the panacea for all uncertainties. For people with modest income, it is always advisable to go for products like children?s educational plan such as Komal Jeevan of LIC, which gives good amount of money at such periods when the child will be in need those sums.
One should not think too much about the returns of a life insurance product. Life can throw at us many nasty surprises like early death, disabilities, prolonged period of unemployment, and so on.
It is not always important to beat the rate of inflation. Even if one?s returns from insurance policy fail to beat inflation, the claim amount helps achieve goals, which should be considered as enough returns from a policy. Insurance is a hedge against uncertainties of life. After all, nobody calculates the return from an insurance policy when a claimant receives full sum assured of R5 lakh although the life assured had paid only two annual premiums amounting to R50,000!
Even whole life assurance with premiums payable either for a limited period or for life is very useful. Such products are available at much lower premiums. The bonus rates are higher than under endowment policies. So, effective returns will be very high. One can get a good risk cover at low premium by taking a without-profit policy, too. Endowment plans with guaranteed additions are quite attractive as well.
Finally, I think there are some sensitive goals in respect of which one should not venture into risky investments at all. One can ill-afford to buy such instruments to build a fund for children?s higher education, or for the benefit of disabled dependents.
* The writer is research associate, Zonal Training Centre, Kolkata, LIC of India. Views expressed are personal and don?t in any way subscribe to views of LIC of India
Traditional way
* Returns from traditional insurance products are in the range of 6-7%
* But a portion of it is used in covering risk
* If we deduct the portion of premium going for covering the life risk and calculate the return on the balance portion, the return is much higher than 6-7%
* The return will be even higher if we take into account the taxes saved.
* Even if one?s returns from insurance policy fail to beat inflation, the claim amount helps achieve life goals
* Above all, it is a hedge against uncertainties of life