Remember in the last post I warned you to stay away from the traditional Insurance Plan agents trying to sell you the various Insurance policies? I am going to list out the various reasons why and also the best alternative for insuring your life.

There is this company called Life Insurance Corporation of India (LIC) and for a long time they had a monopoly on Life Insurances in India. There were many agents of LIC who were selling Life Insurance policies to everyone. There are various products but usually the popular ones are the Endowment policy.

The way endowment policies work is, you pay a monthly/annual premium for a sum assured for a fixed period. If you die before your policy expires, your nominee gets the sum assured. If you survive the policy period, you get the sum assured + bonus.

I just copied some sample numbers from here:

Policy period: 30 years
Premium: Rs. 31,000 per year
Sum assured: Rs. 10 Lakhs (if you die, your nominee gets this)
Maturity amount: Rs. 23.1 Lakhs (if you survive 30 years, you get back this amount)

Now, you might think this is great as you get back 23 Lakhs if you survive which is a great deal of money right? Yes, I agree it is a huge amount – TODAY. But think about 30 years later when you will actually get the money. It isn’t a huge amount.

That is because of inflation. Inflation erodes the value of your money every day. When you were a kid, you could get a notebook for Rs.5. But the same notebook would cost more than Rs.15 today. Things become costly every year and with the Rs. 23 lakhs after 30 years, you would be able to lead your life for only a few months.

The reason so many people put in so much money into endowment policies is these agents make you believe it is an investment for your future. Based on the numbers we see above, this Rs. 9.3 lakh you invest over the period of 30 years (Rs.31000 x 30 years) earns just a rate of 5.4% per annum. This is pathetic considering the rates you could get in every other investment product today.

For comparison (these are the safest investment options you could get in India today):

PPF earns you 8.7%
National Savings Certificate (NSC) earns 8.8%
Fixed deposits earns you 8.5 – 10%
Hell, even some banks have savings account with 6-7% interest rate (FYI, savings account isn’t an investment at all, just a place to park your money for a while)

How much did the endowment policy earn you? a meagre 5.4%

So why the hell do you want to “invest” your hard earned money into a product which can’t even beat most basic savings bank accounts? And this doesn’t even beat inflation.

And in case you die, the Rs. 10 lakhs you get from this policy isn’t going to help your family much, given that you had taken many loans like the home loan, car loan, etc. How is your family going to pay for all these with this Rs. 10 lakhs? Are you sure you insured your life and your family’s financial safety sufficiently?

Lesson for you today: Never mix insurance and investment. 

Yes you read that right. Insurance and investment should never be mixed. If you want to invest your money, put it in some investment product which gives the highest return. There are safer investment options available like the ones I mentioned above (don’t worry, will cover more in the future posts). If you want insurance, ask just for a plain insurance against your life. Never ask for both in the same product.

Term Insurances – cheaper and better

And that is what term insurance does. While the traditional insurance plans lure you with the survival bonuses and investment for your future story and making you live your life not sufficiently covered in case of death, term insurances uses all the premium and just keeps it safe for your family in case you die. There is no investment and there is no return of your money.

Term insurances give you a much higher insurance coverage with much lower costs. For eg: insuring a 27 year old for a sum assured of Rs. 1 Crore (which is 10X more than the endowment policy example we saw), one would pay less than Rs. 10,000 per year (that is 1/3 cost). For 30 years, you would be paying just Rs.3 Lakh and if you die before your policy expires, your family would get Rs. 1 crore which is more than sufficient for most of their needs for the years to come.

Also because it is 1/3 cheaper, the remaining Rs.20,000 per year can be invested in better yielding investments which will also be a source of additional money for you or your family later. The return you get from investing this elsewhere would beat the returns you get from traditional policies and you are also fully covered for your future.

Remember insurance isn’t for saving “your” life, it is for saving your family’s lives after your death. So term insurance is the best form of insurance one can get to fully secure your family’s financial future.

How can term insurance be so cheap?

• Most term insurances are bought online. So no need to pay for so many offices in every corner of each city in the country. No need to pay for agents for selling the policies, etc.
• LIC usually invests the premium you pay in various investments like government bonds, shares, etc. This requires fund managers who make sure your money is safe and yields enough returns to give you your bonus + pay for their huge salary + make LIC profitable. The majority of your money goes into making more money for the company than to give you the best return.
  Whereas term insurance doesn’t require all these as all the money is kept liquid so that any claim can be immediately settled.
• Usually whenever the government offers some stake in public companies for sale, if there are no takers, the government would force LIC to buy up the stake (invest in the companies). Even if the investment is a bad choice, LIC would have to invest as it is controlled by the government.

Are Term Insurances Safe?

So you may ask, if term insurances are safe? Will the company settle claims without any issue? All insurance companies in India come under the IRDA, a regulatory authority, which make sure these companies don’t fail to do their duty. In other words, if you furnished all your details properly (about your health, medical history, etc), these companies can’t reject a claim. Even if they, you can go to IRDA and fight it out.

Now you want to apply for a term insurance. We will see how to choose a good term insurance policy in the next post. And the various things to keep in mind while picking one.