Mar 212017

Insurance is the most misunderstood and most abused financial product in India. Insurance companies have been notorious in duping uninformed customers with misfit products to generate profits. Lack of awareness of Insurance hasn’t helped either. The result is that people ignore this important requirement from financial security point of view.

While Insurance is of multiple kinds, the most basic and most important one is Life Insurance. It’s a product where Insurance company pays a certain predetermined amount (Sum Insured) to the dependents of an Insured person upon death of his/her death, in return for paying a much smaller amount (Insurance Premium) at frequent interval until death.

The simplest form of Life Insurance product is where the Insured keeps paying Insurance Premium at agreed frequency until death or end of policy term (25/30 years or age of 65/70 years) . In case of death within the policy term the dependent gets the Sum Assured and in case where Insured doesn’t die before the end of policy term, NO payout is made. This product or policy is called Term Insurance.

To put things in context, for a Term Plan with Sum Assured of Rs 1 crore the annual Insurance Premium is Rs 19,000 or nearly 0.2% of Sum Assured per year.

But why to buy a Term Plan?

The reason is because you care! A salaried person typically works till the age of 60 years. He/she acquires a certain amount of wealth till retirement and also fulfills important life needs/wants for his/her family- food, house, education, marriage, vacations, jewelry, durables, etc. All of this is provided through the salary he/she earns. But in the unforeseen event of his/her dying early, the dependent family’s requirement would seize to get fulfilled. This is when Term plan helps. A person can secure happy future for his/her family by paying a nominal amount towards Insurance. Term plan fills the financial void created by the departure of the earning member in the family.

Does this mean bachelors dont need it?

Strictly speaking, yes. If one doesn’t have anyone to get benefited then Term plan has no value. However, if one plans to start a family in future then it’s good to have a Term plan created even during bachelorhood. This is because the Premium rate for give value of Sum Assured keeps going up as one ages.

Apart from simple Term plan, there are many other products which provide Insurance along with certain other benefits. However, most of these combo products are financially sub optimal, as these are designed to provide greater return to the company and hence lesser return to the customers. The companies generally lure customers by giving “Money Back” at the end of policy term vs ZERO payout at the end of Term plan. However, the Premium rate for such products (Endowment Plans or Money Bank Plans) are so high that it doesn’t make financial sense to go for such plans.