Life insurance can help you feel secure about your family’s future, but it’s not always easy to decide which one is right for you. In this blog post, we’ll break down the basics of life insurance and provide some helpful tips on how to choose the best policy for your needs. And just to be clear, we’re not trying to sell you anything, so there’s no pressure involved.
The Context
It’s not about how much life insurance you need, but how much your family needs if you aren’t here — Anonymous
Life Insurance acts as an emergency protocol that can be invoked upon the untimely demise of an insured person.
It can help keep your family members from having to fight large financial issues when they may be least equipped and vulnerable to do so. Life insurance is a contract between an insurance policyholder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of an insured person.
Depending on the contract, other events such as terminal illness or critical illness can also trigger payment. Life insurance also acts as a hedge for your investment portfolio. In case of an exigency, your dependents can survive on insurance payouts without disturbing your market-linked investments. Investments such as Stocks, Bonds, and mutual funds are usually positioned for long-term objectives and abrupt liquidations can poorly affect their returns.
There are three types of life insurance schemes available in India.
1. Unit Linked Insurance (ULIPS)
2. Endowment Plans (Return of Premium)
3. Term Insurance (Pure Plans)
Unit Linked Insurance Plans
ULIPs are extremely intricate instruments encased in a maze of costs, commissions, fees, and payments. A few of the charges that are usually associated with ULIPs are Premium allocation, Mortality, Policy Administration, Fund Switching, Partial Withdrawal, Premium Redirection & Premium Discontinuance.
It is an insurance plan that intends to offer the dual benefit of investment to fulfill your long-term goals, and a life cover to financially protect your family in case of an unfortunate event. The whole premium isn’t used for either buying market-linked units or towards life insurance. The portion of the premium used for buying the units is determined after providing for various charges, fees, and deductions.
Some ULIPs allow you a more conservative approach, while other plans allow you a more aggressive approach. Since a ULIP is neither a pure Investment product nor an Insurance product, its knottiness can be examined from the regulation dispute between the Insurance Regulatory and Development Authority (IRDA) and the Securities and Exchange Board of India (SEBI) in 2010.
The central government finally announced the regulation of this product to fall under the jurisdiction of IRDA. Ulips can have up to 30-40% as an agent’s commission in the first year which makes this product a perfect tool for misselling.
Over time, ULIPS has developed a reputation for being the most notorious financial instrument in India, giving in to the avarice of commission peddlers and being supported by private enterprises.
Endowment Plans
In a country like India where basic financial literacy is still a far-fetched idea, these insurance products are commonly sold as savings plans. This approach takes precedence over the fact that many Indian citizens never prefer to save during their lifetime.
As per a Deal Sunny survey, 57% of all Indians have less than ₹5,000 in their savings account or emergency fund. Endowment plans hence become a double-edged sword in tackling both the Savings as well as Insurance problems. An endowment policy is a life insurance contract designed to pay a lump sum principle with an interest after a specific term or on death. Typical maturities are ten, fifteen, or twenty years up to a certain age limit. Mashing both intentions (Insurance+Saving) however, leads to another dilemma.
The endowment policies offer weak investment returns. Although you may receive a significant maturity benefit at the expiry of the policy term, the returns are not as high as market-linked investment products. Endowment plans are typically sold on the open market by both public and private corporations.
Term Plans
Term insurance is a pure protection life insurance policy/contract. It provides coverage for a defined period in exchange for a specified premium amount. The premiums for these policies are significantly cheaper than what you would pay for an endowment or ULIP kind of plan because they are a straightforward, no-frills offering.
This eventually leaves more cash in your hands for high-yield investments such as Stocks or Bonds. In case of an unfortunate event, the insurance contract gets executed else it goes void at a future date and time as per the terms of the policy.
Remember, it does not provide any benefit on maturity; making it affordable. Besides affordability, term insurance is easy to understand, offers multiple payout options (lump sum, monthly, etc.), and comes with additional riders.
Riders are used to enhance basic insurance plans by paying a nominal additional premium. For example, an Accidental death benefit rider ensures additional benefits (over and above) if the cause of death turns out to be an accident. Other riders may include Terminal illness, Accidental Disability, Critical Illness, Premium waiver, and Job loss.
Currently, 24 insurance companies provide term insurance in India. The top ones are Bajaj Allianz Life Insurance, PNB MetLife Insurance, Tata AIA Life Insurance & HDFC Life Insurance basis their claim settlement ratio.
Conclusion
Numerous options may initially seem appealing, but they might ultimately prove to be overwhelming. The anxiety of making the incorrect choice is what leads to indecision (the paradox of choice). Understanding that the finest financial products are ones that are transparent and easy to understand is a simple solution to resolve this dilemma.
It is incorrect to think of insurance as a way to save money or accomplish long-term objectives.
If you own vehicle insurance, you can reasonably associate with this fact.
Life insurance serves as both a financial safety net for your dependents in the event of your death or premature passing and a hedge against your investment portfolio. If you are a financially educated individual, it’s always better to go for plain vanilla products that solve the core purpose of Insurance.
The surplus money must always be directed towards real savings and investing alternatives.
Note: The information presented here represents our personal opinions and should not be regarded as investment advice. If you have any questions, please contact a licensed (fee-only) financial counselor.
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2 Comments
Modest and no distraction article. Keep up with the nice reads planb.
Without a doubt. Thank you, Shaurya.