Insurance Myths

January 30, 2007

By Mohan

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.

17 Responses to “Insurance Myths”

  1. usha Says:

    Planning on investments for rainy days, importantlyy covering life risk of the breadwinner of the family, compulsory coverage of insurance for loans of the family along with insurance for natural calamities and theft are very much essential in todays world.

    Informative post Mohan🙂

  2. Vijay Says:

    Mohan, these are GREAT tips… I have always looked at process of selling insurance with some suspicion .. the thing that bothers me is that they use “negative” messages to sell to you..

  3. praneshachar Says:

    Good one. but as rightly said never mix up investment and insurance. insurance is to cope up a contingency and investments plans should be different after covering the minimum insurance you require on all the things mentioned.
    take into consideration all the tips given by mohan and also take clue from usha’s comment and act. You must be really good to get out of the hands of insurance agent yes if be you must be rough and tough with them if they pester you too much

  4. shark Says:

    A very informative post. Thank you🙂

    I agree I am a sentimental fool. But I can’t help myself in thinking this way

    – As a bread winner of the family, is it money that is finally expected from you. It’s as though saying.. it’s ok even if you are not there.. please make an insurance policy which will take care of me financially!

    – In a educated house hold, what is the need of Insurance if Investments are in proper place? Anyway you can;t save more than what you earn… but atleast this money is safe with you than those insurance premiums which you will never get back!

    – Death of a family member, the least thing you think about is money…. you loose the person. What will you do with his money?

    K. OK! Thinking practical and all is necessary, but in this world don’t we have the capacity to take care of ourselves even if something god-forbid happens? just wondering…..

  5. usha Says:

    Shark

    I totally agree with you in stating t the human loss of the dear and near ones cannot be replaced at all.

    But the absence of the breadwinner in the family gets them shattered.

    Recently my husbands colleague who was just 23, only son for aged parents passed away in a freaky road accident😦. All of them in the office donated a days pay to the bereaved family. Think of the great loss the parents had to get through, an average middle class family’s whole investment is their children, god forbid, if something happens there, they will not be able to sustain that emotional loss as well as the financial part . Life Insurance for such categories has greatly helped. When a tiny ant saves something for its colony’s rany days… we should all think practically and cover/insure for family’s rainy days. In absentia the person will always be remembered , thanked by family members for his contributions.

  6. M O H A N Says:

    Usha
    Sad to hear about that 23 year olds death. This is the case in 75% of cases in INDIA, hope education can help the typical middle class to have this breather option

    Vijay,
    Not necessarily everything the insurance guys peddle is wrong.Hope it helps somebody in planning better.

    Praneshachar,
    Thanks for your views too

    Shark,
    Usha has already illustrated why insurance is important. As per IRDA assessment india is grossly under insured. If you ask around your friends circle you will realize that everybody believes DEATH is not going to happen to their house or themselves. So planning for death to ensure your loved ones are taken care against all those loans , debts is extremly important. Do read that if you are not the breadwinner, there is no loss financially except emotional loss ( as in the case of wife,kid in the above case.)

    Investments give a planned amount back but can NOT cover the huge gap DEATH gives us. You can treat loss of premiums to insurance companies as they are less than 2% of your total earnings in general. But, then again these 2% gets given to a deprived family as usha has quoted. So you are the winner in the end.

  7. Vijay Says:

    MOHAN: I have no problem with the products.. I have a problem with the selling methods…


  8. Not too sure what to comment, it was a very heavy post to me atleast. I thought the same way Shark did.
    All said & done, Money is important but when you measure it so hard, its kind of indigesting!

    Well, now company’s have group insurances which are quite hefty, they talk in terms of 15 lakhs, I guess if you are working in corporate area, ones family will get it.

    One more point, Insurance is good. Its both an investment as well as risk coverage(Investments when you live longer, you get your money + bonus), add some riders like accident rider which double the benefits(in case of accident deaths as usha mentioned).

    Well, when I was attending one of such sessions, the first statement they made was…
    Your investment should be in such a way that your family continues to get your salary amount even after your death(in case).. Kind of pension scheme a state govt offers!! I know why people awe at these govt jobs.

    One thing is sure, generally some of your close relatives/friends become insurance agents & it really becomes an obligation to get insured, its just another reason to get a policy.. I know people like Mohan can give this calculation & say.. sorry boss!!

    Mohan, can talk about Unit linked ones too :-)…. Very nice thought of posting this one here…

    ps – If you can’t afford to pay the premium, better don’t take insurance, you will loose the entire money.. atleast in case of Money backs you would receive some money intermittently.

  9. M O H A N Says:

    Vijay
    Point taken🙂

    Veena
    Agree with you that money even at death is inhuman to talk and calculate.

    Insurance covers risks only to the limits you allow it to🙂

    Yes – Money backs try to beat inflation by many timed returns but still fails to cover you properly. Will take your suggestion for a ULIP soon.


  10. So what is the conclusion we derive, the last paragraph is little ambiguous… Its says, have Insurance with so & so condition & the point d sounds so hard to me.
    Definitely its not for once whims & fancy. Atleast I feel comfortable to have it a method to save some money when the premiums mandates the saving amount. Well, getting loan on an insurance policy is dead easy, just fill the forms & submit .. I had a very good service at LIC of India, if its an endowment policy it fetches you good amount. The more intersting point was ‘Its a simple interest’…

    Is PF, PPF a good repository ? sorry for asking free consultation, you seem to good at answering all my Q’s🙂

  11. M O H A N Says:

    Veena,
    Thanks for propping up my retirement plans🙂

    Veena kindly take an hour to read slowly and think about insurance and investment. Do have both of them upto what you can NEED and AFFORD.

    Agreed endowment policies ( money backs are endowments too) have such high premium that insurance is nominal or ignored altogather and maths has proved that till date.

    Investment and loans are part of life. Invest in a instrument which yields atleast 2% above inflation and after tax. Take loans on those – nobody would stop you.

    But please dont mix both of them. You are both under insured ( in the untoward event happening) and your returns dont beat inflation (forget tax).

    PF and PPF are both same vehicles with a lock in period of 15 years. The great thing about this account is it follows the EEE policy till date. This means Exempt,Exempt, Exempt. This is having the cake and eating it too till P Chidambaram allows you🙂.

    The investment amount in PF/PPF is EXEMPT from tax, The compound interest earned yearly for 15 years is also EXEMPT, finally when you withdraw this money after 15 years it is EXEMPT.

    This is the only instrument all others are EET or ETT formats. PC is trying hard to move to ETT format by next couple of years.

    Hope i have some info for you and not confused you further.

  12. M O H A N Says:

    One correction – PF is locked till you retire or give written statement that you are not working anymore. Loans can be availed

    PPF is 15 year period term instrument with loan vacitlites.

    Obviously they both charge simple interest.


  13. Thanks man for making me aware of some financial jargons. Locking period was not known to me, these days people change jobs so frequent. Transfering is an option & some withdraw after 60 days (stating they don’t work anymore:-))
    I guess you can take loan only after you have completed some minimum 5 years.
    About the cake part, yes its a simple nice truth.

    Mohan, pls don’t give ideas to Chidambaram.. Spare poor people like us..!
    Post office offers a good interest rate & specially for senior citizens, compartiviely they work better too…. I find it easier to transact with them too… RD will fetch you good interest but again with the condition of blocking period of 5 years which is worth it(??)

    Mohan, you can have a separate page created for this post or kind of posts & enlighten us.
    Specially the housing loans, I get multiple inputs from multiple people… Where & How & when to take Housing loans…
    Heard LIC is offering the Housing loan too! No details avaialble still.

    ps – I can create a page for you on MB site too.. pls let me know.

  14. M O H A N Says:

    Palaniappan Chidambaram is having more thoughts of his own and actually am getting ideas from him!
    Yes, its my pleasure to be on MB site. Have already done the “boring” stuff.

  15. usha Says:

    some quote that investment in fixed assets are the only options where hight returns are expected…. what do you suggest Mohan

  16. M O H A N Says:

    Fixed assets from pesonal angle would mean real estate and all those assets which can not be converted to cash immidetaly.

    If my statement is correct then the following hypothisis is correct too.🙂

    Intially people work hard and thier savings start happening. Real estate / land is used to “store” these values. In the second phase they still continue to “store” more values in these but also look at consuming things like soap, sugar, oil etc which need land, capital as inputs.

    Then the balancing starts between the “store” in question and demand for derived products from that like sugar, oil etc.

    Depending on which stage of cycle you are in either the “store” value skyrockets – defeating the very purpose of affordabilty OR hits rock bottom since there is no demand for “sugar,oil” which are dependent on first stage.

    If all the above is confusing just understand that people brought land as investment in peenya to kengari. People in kengari are laughing away with money while kengari people gave up half way through. There is no single reason why land rates should go up lilke that.

  17. M O H A N Says:

    Small typo – Peenya people are crying while kengari people are laughing with land prices. EOD


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