Once you are done getting health insurance for yourself, the time comes for life insurance. Chances of Ashwathama reading this article are low, thus everyone reading this & the one writing this will die. I am not sure who will cry when you & I die (pun intended) but we need to make sure that the reason for the crying is not the money that we brought in every month.
Do you need life insurance?
Here’s a quick test to answer this. Consider yourself gone at this very moment (yeah, I know it’s scary). Close your eyes (not yet, read this sentence first) & imagine the situation behind you. Are the people you are leaving behind dependent on you financially or otherwise? Do you have any obligations like a loan that they will have to fulfil now that you are gone? In addition to the emotional hit & trauma is there any kind of financial trauma they’d have to face? If the answer to any of this is Yes, then you need life insurance. If you have dependent parents, a partner (even an independent partner) or kid(s), then you should go get a life cover.
Why do you need life insurance?
Let’s first talk about the reasons you don’t need life insurance for -
Not to save taxes
Not to save for retirement
Not because your uncle or cousin (or anyone who you only meet at Diwali & forward some gift) forced you into buying some policy
You only need the life insurance for this one reason -
To protect your family’s financial health in case you die.
Choosing a policy for any other reason or multiple reasons would lead you to buy dud products.
But why not choose products that do both - grow my money & cover my death?
Because the products you think do both actually suck at both. To see how, consider the amount of money your family would need in case of your untimely death.
Ideally, you’d need (& want) to cover your family & provide for them till they are alive. The monthly bills, home EMIs, kids education & the list goes on. Consider this as an income replacement. How much lump sum would they need that would fetch returns equal to the income you bring in? I am sure that number would be a considerable sum of money. Ideally, 10-15 times your current annual income. With that approximate number in mind, it’s easier to see how your existing LICs/ULIPs fare.
Look at any ULIP/LIC policy that you already have & look at the cover that it gives you. Not the policy value but the ‘sum assured’ ie the sum that the beneficiary get if you die. Highly unlikely that this number would be anywhere close to the amount you calculated.
These dud policies would usually sound like - pay just ₹50,000 per year for 15 years & after 15 years you’ll get back ₹10,00,000. All this with a cover of 5 lakhs if you die. Wow! Great deal! What better, getting cover + returns too! World is amazing! No it is not. Is the cover anywhere close to the amount you calculated? The answer is probably no. Is 5/10/15 lakh enough as a cover? Imagine you leave behind just 5 lakh for your family & then think about this.
Now coming to the returns. The sellers of these policies play the game of selling absolute whole numbers very well. Pay only ₹50,000 per year that is just ~₹4,000 per month & after 15 years you have ₹10 lakh. You hear all the big numbers & get lost imagining how it would be to get ₹10 lakhs in hand on maturity. Now take a moment to calculate the absolute returns, the annual returns that you’ll get would be in the range of 0.5 to 4% max. A bank FD gives 5-7% interest per annum. A back of the hand calculation to know the return quickly is the rule of 72. Look at how many years does it take to double your money. Divide 72 by that number & you’ll have the approximate yearly returns.
I myself have a dud policy & am trying to get rid of it. You can’t even easily get rid of it. There are no easy & direct ways to get out other than let go of your existing investments in most cases.
What to buy then?
Term life insurance plans. Compared to the other dud policies, you can easily get 20-25 times the cover at 1/5th the cost. A 25-30 year old can easily get a 1 crore cover for an annual premium of ~₹10k for the next 30 years. Your beneficiaries get money only when you die. If you don’t die you don’t get the money.
Wait but isn’t that money wasted? Well, wouldn’t you rather waste money than die?
Also, it’s not a waste. It’s the money you are paying to buy the cover. That you are paying to the insurance company for taking a risk of you dying an untimely death.
Why was my uncle/cousin/relative selling me the ULIP/LIC then?
Umm.. not to comment on the cordial relationship you have with them, they get a nice, fat commission from your premium. This could go up to ~30-35% of your premium. Also, have you ever noticed that this well-meaning uncle is not so pushy at the time of renewals? They usually don’t care to even call & tell you about any upcoming renewals. The commission of renewals is not as high as the first premium commission. They would rather sell you a new policy next year.
Monika Halan, India’s top personal finance expert, says this about the insurance industry in her book -
You need to treat the insurance industry and those who sell the same like walking through reptile-infested waters; you need to stay on the path that is safe. They’re out to get you. You need to look after your money. I’m not joking.
Ok, term plan it is. But, are saints selling those? Won’t they make money off me?
First everyone is in business to make money. So yes, everyone will make money. Please accept that. You need to know if you are getting the bang for your buck. There are a couple of things you need to take care of while buying a term plan -
Get a cheap plan: Term insurance is as simple as it could get. You pay a premium, if you die, the company gives a pre-decided amount to your beneficiaries. Thus cheaper the product, the better. Also, your price gets locked in when you buy & you buy the same price for the rest of the plan period. Buy the plan online as that does not include huge agent commissions in the premium.
Check for the claim experience: Aim to go for an insurer with over 95 percent claim experience. This means that the company pays over 95% of the claims filed.
TL;DR
Keep insurance separate from investment
Don’t buy investment + insurance products - LIC, ULIP etc
Buy a term insurance plan & buy it online
Buy only when you have dependents on your income. And the income which will go away with you. If the income stays after you, you won’t need the cover
Treat life insurance for what it is, a cover for your loved ones when you are gone. Be clear of the objective & then it’ll become easier to choose the correct product.