f you talk to people about insurance, you will find they have plenty of grouses.
We decided it was time to demystify (the myths) or confirm (the truth) behind these common allegations.
Term insurance is not sold aggressively, so it is not a viable option.
Term insurance is the purest and simplest form of life insurance.
You pay the company a premium for a certain number of years. Should you die during this time, your beneficiary gets the money.
Should you live, you will lose all the money you paid as premium. To learn more, read Getting the best term insurance policy.
There's no denying that, for
the last 40 years, high value term insurance products have not been promoted.The reason is that people prefer the concept of insurance with a savings element and the promise of a high, tax-free return.
Ask any insurance advisor which product is the most difficult to sell and, most likely, the answer will be term insurance.
The prospect of no return of money at the end of the term (if he survives) is quite unpalatable to the customer.
Till recently, insurance was promoted only by the Life Insurance Corporation of India and the fact that it was backed by the government proved an added attraction.
Hence, policies like JeevanShree and Bimanivesh gained popularity, while term insurance policies took a backseat.
Yet, as Getting the best term insurance policy explains, there are valid reasons as to why you must consider it. Nothing should stop you from asking your insurance agent about various term policies before you make a decision.
The premium is too high.
This would depend on the kind of policy you are looking at.
When compared to a plain term insurance policy, the premium of other policies is certainly high.
What you must understand is that the premium of a savings-linked insurance product is high because you do get some money back, irrespective of whether or not you use the insurance cover.
In a term insurance, if you do not use the cover, the premium you pay is lost.
Let's say you take an endowment policy for 30 years.
Should you die during this period, your beneficiary will get the money.
Should you survive, you get the money at the end of 30 years.
So you win both ways, whether you survive or not.
Which is why the premiums for an endowment policy are at least three times highter than premiums for term insurance for the same period.
Ditto for the whole life policy which makes you pay premiums all your life and, when you die, your beneficiary gets the money.
Insurance is for the unexpected; it is not an investment avenue
This is a good alternative to consider. Buy only term insurance and invest the rest on your own.
In this way, your insurance policy gives you life cover at a cheap premium.
The rest of the amount -- which you would have otherwise spent on a higher premium -- can be invested in mutual funds or any other alternative investment. Read How to invest in a mutual fund to get an idea.
Your returns will be phenomenally higher.
Do remember that this option will work for an organised and disciplined investor. But, for a lot of investors, the premium slip awakens them from their spendthrift slumber and forces them to save.
This is because insurance premium is considered sacrosanct. Even if he is facing a cash crunch, he will borrow to pay the premium but will generally not let the policy lapse.
The case for savings linked insurance policies is that they serve as a safe long term disciplined saving option. This is an appropriate option for a certain class of customers who are non-market savvy and do not understand the risk-return tradeoff.
Agents lie about ULIPs.
The selling of Unit Linked Insurance Plans as an assured return product is definitely deplorable.
These are investment products that have an insurance component as well as an investing component.
As far as the investing component is concerned, the insurance company will invest in mutual funds. You can decide on an equity fund (where the money is invested in the shares of companies), balanced fund (where the money is invested in equity and fixed income investment) or debt fund (where the money is only invested in fixed income investments).
When your agent does a calculation and assures you of a fabulous kitty at the end of your term, he is not being honest. He is not guaranteeing you that return. What he is telling you is what you could possibly earn, depending on the fund you choose.
The amount the insurance agent entices you with is the total figure that could accumulate at the end of a 15 or 20 year term. He assumes a 6% or 10% rate of return, as per the Insurance Regulatory and Development Authority guidelines. This final figure is calculated on the assumption that the schemes earn the assumed rate of return. It is by no means guaranteed.
If your fund under-performs, you may end up with a much lower kitty; if it over-performs, you may end up with a larger booty.
The Net Asset Value of these life insurance schemes (price of a unit of a scheme) are quoted and printed in all the financial newspapers. This information is available on the company Web sites as well.
So don't be gullible when your insurance agent is talking to you. All the necessary disclaimers are printed in the brochures as well as on the illustrations of the product.
Read the promotional material in detail. Ask relevant questions before you opt for it.
Do your homework
Insurance products are like any other financial product. It is up to you to cross-examine any tall claims and look at the risk element.
The IRDA has prescribed a freelook period on all insurance products. After you buy the policy, read the document and, if find you were misled, you are well within your rights to return the policy to the company and complain against the errant advisor.
You shall be refunded your premium payment after deducting charges, like stamp duty, which are actually incurred.
Press your agent for more information on other suitable, low-cost options before you make a final decision.
The author is vice president, Derivium Capital & Securities Ltd.
