Subhrangshu m
 |
Some time back, a reader informed us why pure life insurance goes against his religious beliefs.
According to him, it works like a betting game. Let's say you insure yourself for Rs 10 lakh at an annual premium of just Rs 2,000. What it means, according to our reader, is that you are willing to bet that you would die this year and so willingly cough up Rs 2,000. The insurance company bets that you will not die and is willing to pay your family Rs 10 lakh if you do. If you survive - which, we're sure, you would really love to - you lose the bet and the insurance company walks away with Rs 2,000. If you win the bet, you know what happens.
This bet goes on over a period of 10, 15 or 20 years, whatever the term of the policy. And so, he concluded, that it goes against his faith to lay a wager on his life. That forced him to arrive at the conclusion that a policy which gave him a return would be a good option because he could view it more as an investment.
Well put, undoubtedly. But not a wise conclusion.
Insurance is not an investment
When you put your money somewhere, you expect something back. Not so with pure term insurance. If you die, your nominee gets something. If you live, no one gets anything. Now that may sound like a raw deal. But, hey, that's what life insurance is all about. Ironic as it may appear, life insurance is not about life but about death.
In their bid to get something out of the money given to the insurance company, investors opt for insurance policies that give you “something back” even if you do live. And, in the bargain, give pure term insurance policies the cold shoulder. While everyone is entitled to their own personal views, we are of the opinion that term insurance is the purest, cheapest and best form life insurance.
The math behind it
Let's assume a profile.
Age: 30-year old male
Life cover: Rs 10 lakh
Tenure: 10 years.
If he opts for Assure Lifeline Plan, a basic term insurance policy from Tata AIG Life Insurance, the annual premium would be Rs 3,510.
Now let's look at the Assure Security & Growth Plan from the same company. Here, in the event of death, the beneficiary will get the sum assured of Rs 10 lakh. But, if the insured person outlives the policy, he will get the sum assured at the end of the policy term. To get this, the premium is now Rs 1,51,250. In addition to the sum assured of Rs 10 lakh if he outlives his policy, he will also get a guaranteed addition of 10 per cent of the sum assured. Depending on the company performance, a reversionary and terminal bonus is also paid (both are not guaranteed).
If he had taken a basic term policy with an annual premium of Rs 3,510, he could have invested the balance amount of Rs 1,47,740 (1,51,250 - 3,510) in any investment of his choice.
Let's say he put it in a mutual fund SIP of Rs 12,000 every month. If he had invested Rs 12,000 every month for 10 years in HDFC Equity, he would have got Rs 1,20,35,724 on maturity.
But with this policy, he would have got Rs 16 lakh (Sum assured of Rs 10 lakh + Rs 1 lakh which is 10 per cent of the sum assured + an assumed bonus of Rs 5 lakh). A far cry from what he would have got had he separated his insurance and investment needs.
Let's look at another type of term insurance policy which is not an investment option but one that only returns premiums.
A basic term insurance policy from SBI Life Insurance - known as Shield - will have an annual premium of Rs 2,043. But Swadhan, a term insurance policy with a guaranteed refund of the premium paid on survival at the end of the policy term, has a premium of Rs 13,816 for the same cover.
So at the end of 10 years, he would get the premium returned to him. This will amount to Rs 1,38,160 (Rs 13,816 x 10 years). Once again, let's take the difference in the two premiums which amounts to Rs 11,773 (13,816 - 2,043). If he had opted for an SIP, the actual figure would be Rs 981 (Rs 11,773/12) but for the sake of simplicity, we will take Rs 1,000. If he had invested Rs 1,000 every month in an SIP in HDFC Equity, he would have got Rs 10,02,977 on maturity. So instead of getting Rs 1,38,160 at the end of 10 years, he could have still had an insurance cover and beaten the return on life insurance policy by investing the balance.
How insurance companies operate
The entire amount you pay to the insurance company is not what is invested. The premium you pay has three components.
(i) Expenses(including commissions earned by the agents as well as expenses and distribution costs).
(ii) Mortality premium
(iii) Investment amount
And, to top it all, the amount permitted to be invested in equity may just be around 8 to 10 per cent of the total investment. So one cannot really expect a great return from their insurance product.
Moreover, the money may sound good now but may not be that great when you finally get it. Let's say you are promised Rs 20 lakh, 25 years down the road. Taking inflation at 5 per cent per annum, that would be worth around Rs 6 lakh in today's prices.
Getting underinsured
The problem with money back polices is that the premium is much higher and one may end up getting underinsured.
Say you are a 26-year old male looking for a life cover of Rs 10 lakh for 10 years. If you took the Shield cover - the premium would be Rs 1,964 per annum.
But, not comfortable with the premiums being “lost” you opt for Swadhan. Now it goes up to Rs 12,791 for the same cover.
Now, because you cannot afford Rs 12,791, you might be tempted to go for a policy of only Rs 5 lakh that would cost Rs 6,396 a year. So in one stroke, you have halved your life's financial worth!
Commissions motive
Each insurance product has its own commission specifications. But the trend is that in the first year, the agent's commission is the highest. It decreases for the next three years and after that drops even more. In the very first year, your agent will get around 15 per cent to 45 per cent of your premium as commission. In the following three years, it will drop to between 5 and 15 per cent. After that, it will be between 2.5 and 7.5 per cent.
Generally, the upfront commission (amount paid in the first year) is the highest and then the trailing commissions are much less. So the higher the premium you pay, the more the agent benefits.
For starters, don't expect an agent to even mention term insurance. He will immediately go for the fancier options. Commissions are his bread and butter and he will try and sell you one that benefits him.
Secondly, don't blindly trust your agent. He has his own interests in mind. He will do his best to convince you why you need a particular product. As one of our colleagues keeps saying that life insurance is never bought, but always sold. So make sure you are not being sold a policy but are smartly buying one.
Finally, now that you know how much an agent earns, maybe you could consider becoming one. |
OnlyMe
|
Life insurance is a contract between the policy owner and the insurer, where the insurer agrees to pay a sum of money upon the occurrence of the insured's death. In return, the policyowner (or policy payor) agrees to pay a stipulated amount called a premium at regular intervals.
There are three parties in a life insurance transaction; the insurer, the insured, and the owner of the policy (policyholder), although the owner and the insured are often the same person. For example, if Qwanda buys a policy on his own life, he is both the owner and the insured. But if Wanda, his wife, buys a policy on Qwanda's life, she is the owner and he is the insured. The owner of the policy is called the grantee (he or she will be the person who will pay for the policy).
Another important person involved is the beneficiary. The beneficiary is the person or persons who will receive the policy proceeds upon the death of the insured. The beneficiary is not a party to the policy, but is designated by the owner, who may change the beneficiary unless the policy has an irrevocable beneficiary designation. With an irrevocable beneficiary, that beneficiary must agree to changes in beneficiary, policy assignment, or borrowing of cash value.
The policy, like all insurance policies, is a legal contract specifying the terms and conditions of the risk assumed. Special provisions apply, including a suicide clause wherein the policy becomes null if the insured commits suicide within a specified time for the policy date (usually two years; some states provide a one-year suicide clause). Any misrepresentation by the owner or insured on the application is also grounds for nullification. Most contracts have a contestability period, also usually a two-year period; if the insured dies within this period, the insurer has a legal right to contest the claim and request additional information before deciding to pay or deny the claim.
The face amount of the policy is normally the amount paid when the policy matures, although policies can provide for greater or lesser amounts. The policy matures when the insured dies or reaches a specified age (typically, 95 years old). The most common reason to buy a life insurance policy is to protect the financial interests of the owner of the policy in the event of the insured's demise. The insurance proceeds would pay for funeral and other death costs or be invested to provide income replacing the deceased's wages. Other reasons include estate planning and retirement. The owner (if not the insured) must have an insurable interest in the insured, i.e. a legitimate reason for insuring another person’s life. |
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