An INSURANCE is an INSURANCE and Not an Investment
Not very long ago many insurance agents came to my father in the beginning of the year with a new diary and calendar.
My father, a teacher made them comfortable, sipped many cups of coffee with them and understood the benefit of having an LIC insurance policy. LIC is as synonymous with insurance as Colgate is with toothpaste. In those days the shrewd insurance Uncle sold my father two policies, one for him and another for my mother. He even took more names as references from my father. He was promoting himself as superman. Yes the same cartoon character who saves the world from evil. Well that’s what the insurance agent was trying to do as well or so he portrayed. He sold those policies as tax saving instrument. And till date my father is bearing the burden of paying the premiums for both the policies ensuring that ‘insurance uncle’ is now a millionaire.
After many years one fine morning of January I got a surprise call from my father.
After the usual pleasantries my father passed the phone to a stranger. To my surprise it was 'insurance uncle'. He first praised my father for the very timely payments of insurance premiums and then asked me if my wife and I had any insurance or not. He offered me many products with good returns linked to the market. After a long explanation from him i only asked him one simple question.
“ Uncle are you selling me insurance, a tax saving product or a product with good returns? Can I get an insurance product for just insurance?” He had no convincing answer and when I asked if he could offer a good term insurance for my 50 year old father the phone was disconnected.
Some things that your agent never tells you-
I have my friend in a PSU which sells insurance products. When I asked him to suggest a best term insurance I could see his wicked smile. He said that the bank was not interested in selling term insurance as it was a bad business idea for banks. Then he went on to disclose why no insurance agent sells term insurance. In plain and simple terms Term insurance is protection against risk to life. Very few understand that a term policy is insurance at its purest and simplest best. You pay premiums because there is a guarantee that if something happens to you, your family will be paid out the pre-decided amount, hence you have the peace of mind that even if you are not there, those loved ones will be well taken care of. As it is the cheapest form of insurance the commission that the agent gets is very low, just one tenth of what he gets for selling a ULIP ( market linked insurance products) and other life insurance policies.
For example if you buy LIC Jeevan Anand endowment plan of Rs.2,500,000 for 25 years you end up paying close to Rs.1 lack per year whereas for a term plan you will require to pay just Rs.5600. The remaining sum if you invest in mutual fund through systematic plan you can fetch much more return than what your insurance company will get for you. So next time when an insurance agent calls you do ask him about the term insurance plan he can offer to you and the chances are you will never get the call again.
Why a term insurance is a must for you-
Simply because it provides a safety net for your family and is the cheapest form of insurance available. The premium depends on the mortality charges, which are lower at a younger age. Hence, the earlier in life you take insurance, the longer the term and cheaper the cost. Term insurance policies cover you for a specific amount of money and for a specific period of time. How do you then decide what is the right amount and right term for you? The amount depends on a number of factors like the age of your children, the important goals that you have, the number of years left to your retirement and so on. Likewise the term of the policy is mostly linked to how long you are going to be working. If you are to buy the term plan of 100 lakh for twenty years and your age is 30 years here is a comparison for you.
| Term Policy
| Agon Religare I term plan
|| 100 Lakh
|| 9600+989( service tax) = 10,589
| Met Suraksha Plus
|| 100 Lakh
| ICICI pure protect elite
|| 100 Lakh
|| 15810 +1628= 17438
| LIC AMULYA JEEAN
|| 100 Lakh
Do not buy One but MANY-
One more thing which your agent will never tell you. He will tell you his age, his experience, his track record but will not make an effort to help you with simple mathematics. Here's the catch. It makes sense to split your life insurance needs by buying a number of policies instead of just one. Let us understand this with an example. If one requires an insurance cover of Rs 1.5 cr for 20 years, the same policy could be split into, say, 3 policies of Rs 50 lakh each with terms like 10, 15, 20. The point to understand is that Rs.1.5 cr cover will not be needed for the entire 20 years, if you were to work it out it may be required only in the initial few years. This way, there will be two advantages.
First, after completion of the period, the premium for that policy stops, boosting cash flows. In this example, after 10 years, the first policy would stop and consequently that premium need not be paid. Secondly, since these policies are of shorter tenure, the policy holder will be paying lower premiums as well. This is a double benefit that can make a huge difference in the premium, without compromising on the protection requirement.
For example if you buy a Rs 1.5 cr policy for 20 years, the premium for ICICI Pru pure protect comes to Rs 39,279/- pa. However, if you split the policy into three of 10/15/20 year terms, you will pay a total premium of Rs 33,982 pa which is a difference of Rs 5,297/- pa. Now after 10 years, one policy would end and a premium of Rs 9,707 would not have to be paid. Over time, one policy after another will keep on closing and premiums to be paid becomes less and less. If we were to calculate the premiums in the first scenario where he takes one policy of Rs 1.5 cr for 20 years, he would pay a premium of Rs 7, 85,580/- over that time period. In the other scenario, where he takes three different policies, he will be paying in all, Rs 5, 26,660/-. That is a staggering difference of Rs 2, 58,920/-, over the period. This is without compromising on the life cover requirements. It does make sense to have a clutch of policies with different terms, doesn't it?
The last word-
If you are still confused whether you should go for a term plan because you end up get nothing if you survive here is year another option for you. There is a plan with Birla Sun life Insurance company which returns your premium paid when you survive after the term of the policy. For example if you buy term insurance of 12 lakh for 20 years you will have to pay 6000 rupees as annual premium. And the company will give you 2.40 lakh after the maturity of the plan. But if you study carefully the premium is higher in this product and the same will be used to give you the return back. After all insurance companies are not doing charity. So the investment mantra for insurance is just one. Never mix insurance with tax planning. Never mix insurance with capital market linked returns.