Life Insurance is a highly misunderstood and mis-sold financial product. And off late there is an ‘emergence of overprotection’.
Most popular Life insurance products in India are – Traditional Endowment Plans, ULIPs, Term Plans, Premium return Term Plans, etc. Such a variety of Life Insurance products makes it difficult for an individual to choose the best fit.
There is always a dilemma – What is the right & appropriate Insurance cover?
I have tried to simplify the essence and the need for Life Insurance as a financial Product. And also bust some infamous myths surrounding it.
First things first – Life Insurance is a substitute for Human Capital
It is never meant for the person insured. It is a form of assistance to the family members of the individual (insured) who are financially dependent on him/her.
The core purpose of Life Insurance is to provide financial protection to the surviving dependents, after the death of the insured person and maintain a family’s current lifestyle, in case of disruption to the regular income
A very important factor to consider while choosing value of a Life Insurance Policy is the House Hold Balance Sheet
If a family has large debt obligations in the form of home loan, car loan, personal loan, consumer loan, etc., adequate protection to pay off liabilities is a MUST. Always decide the quantum of protection considering the time value of household expenses and debt obligations pending to be honored.
Life insurance protection is a binary event with an outcome of 0 and 1. As a family of an insured individual, we hope and pray that we may never have to avail the insurance proceeds. However, we try and keep the family protected, adequately, in case of any eventuality.
In cases, where both the spouses are earning, Life insurance maybe not required, provided the family does not have major outstanding liabilities. The income of either of them is sufficient to take care of the household expenses.
A Life Insurance is a pure protection against a low probability, high severity, and unforeseen event
This event is beyond our control, but its after-effects can be mitigated by buying an adequate cover.
Let us understand the various Insurance products available in the market:
Traditional Endowment Plans: Neither they provide adequate insurance cover nor the returns on investments. Their returns are even lower than Fixed deposits. Thus, the purpose of protection and savings remains defeated. Examples: LIC Jeevan Anand, Jeevan Saral, Jeevan Rakshak, etc.
ULIPs: These are market-linked insurance plans. ULIPs provide the option of both protection and investments and generate higher returns than the traditional endowment plans. ULIPs have a higher premium than traditional Plans. They provide the flexibility of investments across different asset classes; thereby generating better returns. Overall, the cost of management (fees & administrative charges) is much higher than mutual funds. Thus, returns are inferior to mutual funds and have higher lock-in period requirements.
Term Plans: They provide pure protection against unforeseen eventuality and premiums are the lowest among all the life insurance products. They are the best economic fit as a life insurance product.
In recent times, there is a surge of Premium Return Term Plan policies. This is a gambit. These schemes make insurers believe that they are getting the premium money back. But the returns on the extra premium paid via a pure term plan is much lower than Fixed Deposits (FD).
Do not mix Insurance with Savings or Investment. Protection and Investments should be managed separately with well-defined objectives and goals.
Many insurance players have emerged in the market. Choosing the right Insurance Partner and Plan becomes confusing and tedious. However, all the insurance companies are regulated by IRDA, with the same yardstick. Keep in mind, as long as all the required disclosures are made fairly, insurance claims would be honored.
Personal finances are very simple, if you keep them simple. But keeping them simple is the most complex thing to do.
Cover Image Source: Outlook India