A good friend of mine commented that their lives are safe and risk free since they had purchased insurance for themselves as well as their 4 yr old kid. It was quiet amusing since the details went something like this:
a) Husband who is working in an MNC, is having a policy for Rs.3 lakhs and is paying Rs.25,000 per annum as premium.
b) Wife is not working and a policy for Rs.1 lakh is being taken for which Rs.10,000 per annum is paid as premium.
c) The kid is a 4-year-old and is having a policy where the company will pay Rs.25 lakhs to him at the age of 18. Premium for this policy is Rs.14,500 per annum.
Let us just sum it up and paint the bad scenario (which I am always good at doing):
a) In case the husband dies: The widow is left with Rs.3 lakhs insurance amount instantly. What is she going to do with that “big” amount with no job and a kid to take care?
b) In case the wife dies: Husband gets Rs. 1 lakh. Is this money useful in any way? Since she was not earning, this should not matter at all.
c) In case the kid dies: This is primarily emotional loss. Nobody would like to make money on this aspect.
So how did the insurance agent convince the family into this?
He did the usual trick every agent does – he under-insured you for his benefits. Shocked? Here’s how…
There are 2 basic types of policies. The first is Term Insurance. This simply means while you pay premiums every year, if the untoward event happens, you are paid the policy money (insured amount) but incase you survive; you don’t get anything at the end.
The second is Endowment Insurance. This simply means while you pay premiums every year, if the untoward event happens you are paid the policy money (insured amount) but incase you survive, you ALSO get BONUS money.
Well, the agents get about 1-3% maximum commission for a term insurance while they get a hefty 11-15% in the first year, 6-8% in second and then on 2% regularly on the endowment insurance. Obviously the agent would like to maximize his commission and he “sells” you the endowment policy.
There is a side effect due to which the insurer in this bargain loses. This is that the premium amounts for term insurance is extremely low. For a healthy husband of an MNC, he would be paying Rs.9,850 per annum for a cover of Rs.10 lakhs and would have got an insurance cover of near 30 lakhs for the current premium he is paying on endowment policy.
Never mix insurance with investment is a statement no textbook or blog site teaches you today. Look at the returns (BONUS) given out which are never promised. They historically range between 4% to 8.5% peak. Take away the inflation of 5% on average and you are left with near nothing in your hands.
So it’s a double whammy – you are under-insured if you don’t survive the period. You are also losing your money if you survive.
Sadly in India – insurance is “sold” and not “bought”. So please re-evaluate your “insurance profile” today using the following tips:
a) Never use insurance as a mode of investment – it is not worth it.
b) Insure at least 20 times your annual income for every bread winner in the family.
c) Add up all the EMI’s you need to pay up including children’s education, housing loans, marriage etc. when you arrive at the “insurance figure”. This is the amount you can NOT live without.
d) Do NOT insure people who are not bread earners – there is no immediate danger of financial loss there.
e) Kids fall into above category (d) due to which you can have a separate investment plan.
Planning to shoot that family agent? Don’t spare him but spread the news around so that somebody at least is not made a fool of.