Life Insurance need not be complex or expensive

When I had started working more than 15 years ago, I knew nothing about and thought nothing of Life Insurance. But my parents had “invested” in a BigCoPolicy (name changed) for me. Some of colleagues/friends also “invested” in Insurance policies because their parents said so. Or because a friendly but pushy BigCo agent was always somewhere nearby. Oh, and the BigCo agent would pass back commission quietly in cash which seemed like such a sweet thing to do even though it’s illegal.

Sounds familiar, right? But isn’t there something wrong in all of this?

Life Insurance is a necessary for financial security of our loved ones. But the way it’s positioned and sold, it confuses the best of us and we either avoid or delay the decision to buy life insurance. If thought of and bought purely as risk cover, it will be neither complicated or expensive. Let’s look at each of these one by one.

1. Life Insurance has been traditionally positioned and sold as an investment product.

Well, it’s not. The main job of an insurance policy should to provide a fixed amount to your loved ones in the event of your untimely demise. Perhaps, a better way to think of Insurance is purely as a risk cover (mortality cover) and not as an investment. Term Plans, as they are called in industry parlance, are pure risk products. They pay only in the case of the death of the insured.

Also, think about  Car or Health Insurance. You pay a premium every year but neither policy pays you anything if there’s no claim right? Term Policies are just like that.

For investments, look at mutual funds.

2. Life Insurance is expensive.

Sure, it seems that way when you are looking at Endowment Policies or Return of Premium or Money Back Policies. These products lure us by offering your money back with some returns. To give you this money back, you are charged a higher premium that includes an additional amount on top the risk cover. And, this is the amount that gets invested to generate returns for you.

For this reason, endowment policies have a much higher premium than term policies. We did a sample check on the BigCo website to compare one of BigCo’s Endowment Plans with their Term plan. The annual premium for a 25 year old for a 35 year policy with a 1 crore sum assured was INR 2,58,533 and INR 22,344 respectively. This means you pay about INR 2.36 lakhs additional every year. And this gets invested into various permitted instruments such as Government Bonds, other fixed income instruments and a small amount of Equities.

The effective return on the premium usually amounts to 4-6% (XIRR) annualized over the policy term. There’s enough literature on this online. So, you are “investing” in a product with sub-par returns.

For insurance agents, higher premiums translate into a higher commissions so no prizes for guessing whether they will push an Endowment Policy or a Term Policy.

Suppose you bought the INR 22,344 term plan and alongside invested the INR 2.36 Lakhs in a diversified Mutual Fund Portfolio for this 35 year period.  Depending on your risk profile and the selected funds, you can potentially receive much better returns than what you get from “investing” in an Endowment Plan. As an example, a fund that mirrors the Nifty index could have generated compounded returns of around 12% annualized over the last 20 years.

3. Life Insurance is complicated so I will buy it later.

It won’t be if you just buy a term plan. Just compare the premiums payable, claims ratios, exclusions to the policy and some such simple parameters. And when you start earlier, the premiums will also be much lower. So, you will be able to afford a much higher insurance cover now than if you start five years later.

So, what should you do?

Buy a term plan and invest in a diversified portfolio of Mutual Funds! That’s it.

If you don’t know about Mutual Funds, talk to an advisor or look them up online or look here. Apart from potentially better returns, Mutual Funds are more liquid as you can redeem your investments at any time without penalty (except locked-in funds). You can invest as much or as little as per your finances permit at the time unlike endowment plans where the premium amount is more or less fixed for the tenor of the policy.

Bottomline

Insurance cover provides timely cash to your loved ones in case something happens to you. It is an important pillar of any personal financial plan. Don’t ignore or delay buying insurance cover. Consider term plans as they are easy to understand, have fewer restrictions and do the job that you need them for, protection.

Convinced about the need for Life Insurance and that the right thing to do is buy a simple term plan?

You can look at attractively priced term plans brought to you by HDFC Life here. An expert from HDFC Life will reach out to you and help you choose and complete the policy issuance.

And for your investing needs, consider mutual funds. Visit www.kuvera.in to invest in “Direct Plans” of Mutual Funds and save BIG on commissions!!!