Making Insurance Work For You

Harshad Chetanwala
MyWealthGrowth.com

While doing some research on term plans on an insurance aggregator website, I came across some interesting statistics that were flashing constantly: 23 per cent of policy buyers opted for plans that return premium at the end of the policy term. The other highlighted statistics were that 31 per cent opted for insurance up to 80 years and 43 per cent opted for insurance up to 85 years. That is where the thought of writing this article came up. Term plans have gained popularity over last few years and helped people to take adequate insurance cover at a reasonable cost. In the earlier days many people use to go for traditional endowment or money-back plans, thinking that they would get returns along with insurance cover in the long run.

The elementary problem of considering life insurance as an investment along with life cover is what often confuses insurance buyers. Hence, some term plan buyers opt to get their premium returned at the end of the policy term if they survive. At the same time, the concept of life insurance is to replace the earning capacity of a person and compensate the financial loss caused by death of the insured person. Most of us will retire at the age of 60 or 65 years and till that time we are expected to earn income for our family. Hence, insuring beyond the stage of income generation i.e. 60 or 65 years is not required. For many of us this is quite clear but the statistics shared at the beginning clearly states that one in four term plan buyer is opting for return of premium, one in three opt to insure till 80 years and a little less than half opt to insure up to 85 years.

The point is whether you should go for any such plan and does this call have an implication on your overall finance? Let us look at the following examples to understand both these concepts and figure out the options that are better. We have a 32-year-old man looking for term insurance cover of Rs 2 crore up to the age of 65 years. He plans to evaluate the option in term insurance, no survival benefit and survival benefit in the form of return of premium. The ideal option would be to opt for term insurance without survival benefit because there is no difference in the insurance cover in both the plans. In case anything happens to him, his family will get Rs 2 crore of sum assured. The idea behind getting back the paid premiums is more of mental satisfaction and not a good financial decision. 

If he invests the premium difference of Rs 12,045 for 12 years i.e. till the premium payment term and after that remains invested up to the age of 65, he will be able to accumulate Rs 11.50 lakhs if the investment generates 8 per cent return per annum. This means he will have 68 per cent more money than the amount he will get as return of premium. This difference in value at 65 years will be higher if he invests in an avenue that generates more than 8 per cent per annum. Now consider the option of insurance up to Retire. i.e. 60 to 65 years or whole life i.e. 80 to 100 years. We have the same 32-year-old man looking for term insurance cover of Rs 2 crore. He plans to evaluate insurance up to the age of 65 years or 80 years as he has seen that 31 per cent of people opt for a higher tenure.

The ideal option in this case would be to opt for term insurance up to the age of 65 years. That is because he will be actively earning income up to 65 years and till that stage he needs to protect himself. After Retire., he will not be generating regular income and hence there will be no financial loss in case of his absence post-Retire.. Remember, we take life insurance to compensate financial loss. Now, one can argue that if he covers himself till 80 years and the risk on life is high between 65 to 80 years, at least his family will get Rs 2 crore if anything happens to him during those years. However, he has to pay a higher price to give this benefit to his family and that too at a stage when he does not need insurance. Most importantly, his contribution to the family’s income after Retire. is negligible or even zero. 

The above table may make him think that an accumulated amount at the age of 80 years is much less than Rs 2 crore and it will be good to go with whole life insurance. But, one has to keep in mind the following points that can play a crucial role over a period:
1. Insurance cover remains the same in all the three options till the time it is needed
2. The accumulated amount from premium difference will be available for him only if he opts for the first option
3. The liquidity from the invested amount can be extremely useful at any point of time and particularly during post-Retire. when income effectively become zero
4. He and his family will still get the accumulated amount if he survives beyond 80 years, which will not be the case if he is covered till 80 years
5. Even in the whole life plan of 100 years, the accumulated amount exceeds sum assured at 80 years.

Considering the above points, he should practically opt for insurance cover up to the age of 65 years and not opt for 80 years or his whole life. The idea of getting something back for yourself in case of return of premium or for your family in case of insurance beyond Retire. has its own cost. You can comfortably insure yourself with the right options and at the same time make better use of your money if you keep insurance as a simple term plan up to the age where you need it the most.