INSURE FOR THE SAKE OF INSURING

(Source: Times of India, Mumbai, 21st August- Your Money)

By keeping your insurance and investments separate, you will not only better protect your family, but also earn higher returns

Madhu T

INSURANCE companies and agents never miss an opportunity to repeat the old chestnut that insurance is always sold, not bought. No wonder, then, that many still consider insurance a tax planning tool or a forced saving programme. For some people, it is even an investment. Oddly, few people consider buying insurance just for the sake of insuring their life. That probably explains why so many people end up with the insurance policies that least suit them.
“In the old days, we sold insurance as a tax planning tool and a compulsory saving. But things have changed after the privatisation of the insurance industry,” says a veteran agent of the Life Insurance Corporation of India. “However, even though plentiful information is available today about insurance, people still cling on to old ideas.”
An insurance advisor with a private life insurance company says, “It’s still easier to sell a child plan or a unit-linked insurance plan than a pure term plan. People seem to set a lower priority on figuring out how the insurance plan would actually work for their family in case of an eventuality.”
Why are these insurance advisors griping? Should they be held accountable for their customers’ disinterest in a pure insurance cover? Says the insurance advisor: “People often say we’re not interested in selling pure i n s u r a n c e cover because we don’t a get good commission. That’s not true. Even after you present a slideshow about pure term life cover, most of the questions you get are still about the child plans and ULIPs (unit-linked insurance plans, or insurance plans with various investment options). People are always impressed by the performance records of ULIP schemes and the of cute children on the advertising hoardings and brochures. The thing is, people don’t want to listen to plans about death and stuff like that.”
Why? It can’t be that people don’t care about their families. Surely they understand that if they go for expensive insurance policies with a savings or investment portion in the premium, they may remain underinsured? For example, a Rs 1 lakh endowment plan with for a 20-year term would cost you around Rs 5,000 a year. That means forking over about Rs 50,000 as the annual premium for a cover of Rs 10 lakh. Compare this with paying about Rs 3,000 for a pure term insurance cover of Rs 10 lakh.
Software engineer Sreekumar K is one of those people who asked his insurance agent about a child plan for his daughter. He admists a bit sheepishly that he does know what pure
term insurance is. “I have read about it. Still, I wanted a child plan for my daughter for mostly sentimental reasons.” And what about the adverse consequences of his decision? “Yes, I do think my family would be in trouble if something happens to me right now. But I’m working on it; I’m planning to buy a life insurance policy next year,” he says.
Would he consider buying a pure term cover? “I have my reservations about buying a pure term policy. I’m not too thrilled with the idea that I’ll get no money when the policy matures,” he replies. But what about the huge difference in the premiums for a pure term cover and an endowment plan? He can buy a pure term cover by paying a little over Rs 3,000, as opposed to Rs 50,000 for an endowment plan. “But I’m told the endowment plan will give me returns of more than Rs 10 lakh at the end of 20 years,” he says. Sure, but at the end of that period, he would have paid a total premium of around Rs 10 lakh, while a pure term plan would cost him around Rs 60,000 over the same period.
Says a financial advisor, “Most people don’t realise that traditional endowment plans return only around 6-7%. If you keep your insurance and investments separate, you can earn much higher returns.” According to him, if Sreekumar were to opt for a pure term plan, he would save a lot on the premium, which he could then invest in a diversified equity scheme of a mutual fund. “Equity has returned around 17% returns in the last 15 years. Also, if you feel such schemes are not keeping up their performance, you can always walk out. That would not be such a good idea in an insurance plan,” he adds.
That brings us to ULIPs, a hot favourite of insurance customers. Though ULIPs offer various investment options, most investment experts are not too keen on the idea. One reason for their hesitation is the huge deductions from premiums, on account of administrative costs and the agent’s commission, for the first three years. The result of these deductions is that they leave the customer with a smaller investment corpus. The second reason they cite is that ULIPs are not very transparent about hidden costs, which insurance companies deny hotly. Says the financial advisor, “If, for some reason, the market fares poorly in the first three years of your plan, you could be in a lot of trouble.”