The other day, an investor who had approached us, said he could not buy pure life insurance as it goes against his religious beliefs. He then explained his stance in a very tongue-in-cheek manner.
According to him, insurance works like a betting game. Let's say you insure yourself for Rs 10 lakh (Rs 1 million) at an annual premium of Rs 2,000. What this means, according to our reader, is that you are willing to bet you would die this year and so willingly cough up Rs 2,000. The insurance company bets 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.
It went, he concluded, against his faith to lay a wager on his life. This 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. This is yet another reason why people shun a basic term insurance policy.
The common mistake most individuals tend to make is confusing insurance with investment. When you put your money somewhere, you expect something back. With a term insurance, that is not the case. 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 is 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. In the bargain, they 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 and best form of life insurance. Not to mention the cheapest too.
Insurance and investments must be mutually exclusive
When agents tout fancy figures, the lure of insurance doubling up as an investment avenue becomes irresistible.
For example:
Insured individual: 30 year old male
Life cover: Rs 10 lakh (Rs 1 million)
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 us look at the Assure Security and Growth Plan from the same company. Here, in the event of death, the beneficiary (person named in the policy, should he die) will get the assured sum of Rs 10 lakh. But, if the insured person outlives the policy, he will get the assured sum at the end of the policy term. To get this, the premium shoots up to Rs 1,51,250.
If he outlives his policy, in addition to the assured sum of Rs 10 lakh, he will get 10 per cent of the sum assured. Depending on the company's performance, bonuses are paid too, though they are not guaranteed.
So, he would get Rs 16 lakh (Rs 1.6 million). How did we get this figure?
Sum assured = Rs 10 lakh
10 per cent of the sum assured = Rs 1 lakh
Bonuses = we are assuming the figure to be Rs 5 lakh.
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 us 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. Or, if he had invested in Franklin India Blue chip, he would have got Rs 1,02,68,892 on maturity.
Need we say that Rs 16 lakh is a far cry from what he would have got had he separated his insurance and investment needs?
Pure insurance and insurance
Some insurance policies only return the premium; they do not offer an investment option. We looked at two such options from a private insurer using the same example as above.
Insured: 30 year old male
Cover: Rs 10 lakh
Tenure: 10 years
We compared two annual premiums from a private insurer. One was on a basic term insurance policy. The other was on a term insurance policy where the premiums are returned to you at the end of the term. The difference in premium per annum in a year amounted to around Rs 12,000!
Let's say the investor took the basic term insurance policy and invested the balance Rs 12,000 in a mutual fund SIP. 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. Had he done the same in Franklin India Bluechip, the amount would have been Rs 8,55,741 on maturity.
So, instead of getting around Rs 1,40,000 at the end of 10 years (when all his premiums are returned), he could still have an insurance cover and invested the balance for a higher return.
Getting underinsured
The problem with money back polices is that the premium is much higher and one may end up getting underinsured.
Let say you are a 26 year old male looking for a life cover of Rs 10 lakh for 10 years. If you took a basic term insurance policy from SBI Life Insurance -- known as Shield -- your premium would be Rs 1,964 per annum.
But, not comfortable with the premiums being 'lost', you opt for Swadhan, a term insurance policy with a guaranteed refund of the premium paid on survival at the end of the policy term. The premium here 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! If something were to happen to you, your family would get much less than they deserve.
Note: All quotes for life insurance are taken from the life insurance company websites.
Important terms
SIP: A Systematic Investment Plan. It refers to investing in a mutual fund, fixed amounts every month.
Policyholder: The person taking out the insurance policy
Beneficiary: The person named in the policy should the policyholder die
Premium: What a policyholder pays to the insurance company
-- Value Research is a mutual fund research organisation.
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