Let me start with a simple description of ‘Term Insurance’: In the unfortunate event of death of the policyholder, the nominee gets a pre-decided amount, called the 'sum assured'. There is no money paid back to the policyholder in case he survives the term of the policy. This type of policy covers only risk and is not an investment tool. In fact, we can also go to the extent of calling it the only 'pure insurance' product available. Hence, term insurance is also the cheapest form of insurance product. You can pay a small premium and get a very large insurance cover. The rest of the products are a mix of insurance and investments with increasing levels of complexity and charges to add to them. Of course, trust the financial wizards to bring some complexity into term insurance also – increasing term insurance, decreasing term insurance and a host of riders which all come with a cost attached to them! There are merits in these variations also, provided one knows which suits them best.[INSERT_1]
Most people spend a lot time, effort and money in different forms of investments – ULIPs, mutual funds, equities and fixed deposits, to name a few. All these products use your money and try to make more money out of it. In some cases, the returns are fixed and in some they are linked to the market. So if the market goes up, you make money and if the market goes down, you lose money. And wherever the returns are fixed, the rate of interest is usually very low. Well, I am not suggesting that one should not invest in these, but it should ALWAYS be after one has taken adequate term insurance cover. In fact, a healthy portfolio is always a mix of sound insurance and investment products. Just as one invests in debt and equity to 'hedge risks' in investments, one should insure and invest for 'complete peace of mind' when it comes to planning for your family. And when I say adequate cover, I would be suggesting between 7 to 10 times your current annual income, maybe even more, given the inflation levels we have seen in the current times. The investment tools should be used to multiply your money and not to provide the basic cover which ensures peace of mind for you and your family.
If it is so obvious, why don’t people take adequate term insurance cover? Well, for starters, money paid by you in the form of premiums is not returned back to you. This seems to be the only factor which people seem to be using to evaluate term insurance and hence go on to opt for the more attractively packaged 'high returns' products. This is a wrong way of looking at your safety net because we are talking about insurance and not investments. When you think insurance, your only aim should be to provide as big an amount to your family and children, in case you are not around. In case you survive till retirement you would anyway end up saving a substantial amount through investment tools or by just putting money into the bank.
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All the confusion and counter-arguments start when you mix insurance and investments. Hence, I suggest that we delink insurance and investment for the moment. If your objective is to provide a lump sum amount for your family in case you are not around, you should be looking at the highest possible amount by paying the least possible premium. Well, that is exactly what a term insurance provides - lots of cover at very low premiums. Let me explain this in detail by citing an example – by paying an annual premium of Rs 3,000 one can get an insurance cover of Rs 10 lakh if you opt for term insurance. But if you go for an endowment policy you would need to pay an annual premium of Rs 44,000. One could argue that in the endowment policy, we would be getting back an amount when the policy matures. That’s true, but only if you survive! And insurance is actually taken to ensure complete protection for your family. So, if you had taken a term insurance and died after two years, you would have paid Rs 6,000 and your family would have received Rs 10 lakh. If you had taken an endowment you would have paid Rs 88,000 and your family would have received more or [INSERT_2] less the same amount of Rs 10 lakh. That’s how effective a term insurance is! (For the purpose of this example, a healthy male of age 35 was considered.)
You don’t need to take one term insurance plan for a very high coverage amount. Depending on your stages in life, keep adding term insurance to your portfolio. You could be opting for the first term insurance as soon as you get your first job. Then increase the amount by buying another term insurance when you get married and then maybe further increase it when you have children. If you plan it well, there can be nothing more satisfying than knowing that your family is adequately insured at any point of time. In fact, if you have a good term coverage amount, you can actually invest in riskier products over a longer period of time, knowing fully well that your family is completely secure even if your riskier investments go wrong. But yes, the earlier you take a term insurance, the cheaper it will be – that holds true for any insurance though.
When I was a child, I had heard a very interesting comment. God was asked – “What is the most perplexing thing you find about life?” and He it seems had replied “Any instant there is at least one person dying in this world but if you ask anybody around you whether he / she is likely to be the next one, everyone, irrespective of their physical condition or age will reply – No, not me”. We human beings are eternal optimists, which is extremely good for the progress of mankind; but do we actually know what will happen to us tomorrow? So isn’t it better to err by being over-insured instead of being under-insured? Perhaps life is like the clichéd statement on cricket “a game of glorious uncertainties”. I feel it doesn’t pay to challenge fate – it perhaps is a bit like Murphy’s Law – “if anything can go wrong, it will”.
To sum up, if you are thinking of buying your first insurance product, make sure it is a term insurance. Once you have taken more than adequate amount of term insurance, use the balance part of your savings for investing in the more “attractive products”. And for those who have a lot of investment products, but not term insurance, I would suggest you get one now. When thinking of just insurance, think term insurance; when thinking of investments – evaluate all of the rest!