You don’t buy life insurance because you are going to die but because those you love are going to live and as such insurance should be the first step for every saver to take. Financially speaking, you should get insured before you think of doing anything else. However, to do this correctly you will have to understand what insurance really is and how much you actually need. In simpler terms, life insurance is an arrangement by which a company will compensate your survivors if you die, in return for payment of a specified premium. You need to keep in mind that this is the only definition of insurance and much of what insurance agents try to sell you is surely – Not Insurance.
All of us believe that Heaven is an amazing place but nobody wants to die. Now imagine a scenario – You are no more, would your family be able to live a better, same or worse lifestyle than they have now. That’s precisely the reason we need life Insurance. Simply put – Unless you are immortal, you need life Insurance. One basic question that arises here is – How much should you be insured for? There are numerous ways to arrive upon the answer but a starting point could be ten years worth of your current income. This will obviously vary according to other family members’ income, assets, house, etc., but rarely would an amount less than ten years’ income suffice. If you don’t believe me, quickly make a rough estimate of what your family’s budget would be if you were to die soon. Over the years, Insurance sellers have encouraged an investing culture where people are averse to buying term insurance because – ‘You get back nothing’. This was primarily done to maximise agent commissions. I am not going to get into details in this regard as it’s not possible to be charitable while commenting honestly about this existing system, so I won’t even try. This system exists because the regulator is asleep, majority of the agents – manipulative and customers – foolish. The system won’t change, so it’s up to you to learn how to actually buy insurance. To put it in perspective needing insurance is like needing a Parachute. If it isn’t there the first time, chances are you won’t be needing it again.
Coming back to the basic question – As a general rule, any earning person should be insured for at least ten years’ his/her income. However, life cover in Unit Linked Insurance Plans or simply ULIPs, almost universally, is exactly ten times the annual premium. Therefore, to get life cover equal to ten times your annual income, you will have to pay all your income as premium. Don’t you feel that maths like this is unshakeable. No matter what the sales people or the analysts say, anyone who has a family should not put even one rupee of his/her hard earned money in ULIPs (or any other investment) before they buy a Ten times (10X) life cover policy using, Pure Term Insurance. Once you secure your family’s future with 10X your annual income, you can treat your investments as a different ball game. Let me explain the numbers in detail. Suppose your post-tax, in-hand income is INR 10lacs a year, then you ought to have a life cover of at least INR 1cr. If you think about what all, your family will have to spend on if you die suddenly, then you will find this 10X barely adequate. Most families will actually need more. If you do not believe me, make an actual multi-year budget. The good news “impacting you” is that such a 10X insurance is quite reasonably priced if you buy it through Term insurance products. The bad news “impacting the ULIP sales person” is that buying INR 1cr life cover in the form of ULIPs will require an annual premium of INR 10lac. But how can you pay INR 10lac – that’s your total income!
Try discussing all this with an insurance sales-person, they will tell you that ULIPs also have investment bundled with insurance. While that is true in theory (ULIPs are perceived to be plain Vanilla products catering to your Insurance & Investment needs), however, in practice, any sensible saver should first get adequate life cover. If you do that, you will find that the only insurance product that fits the bill is PURE TERM INSURANCE.
Once you are done with the insurance part, then you can evaluate a wide variety of investment options in a better way. The biggest problem with ULIPs is that if you use them to buy an adequate amount of real insurance, then you could consume most or even all of your income. As a matter of fact, I use the word INSURANCE to mean what it should do – money that your family will get if you die. So, why is that a better way? Because any investment should be evaluated on parameters like liquidity, volatility, safety, transparency, returns and suitability for different time frames. The same saver has different needs for different aspects of savings at different points in time. Sometimes, as circumstances change, you may want to move some money from one kind of investment to another. For example, from a volatile but high returns type to a safe and steady one. At some point, one could have a professional crisis or a job loss and may need to stop investing for a year or two. These are real issues that impact almost everyone at some point. Does a product that bundles insurance and investment into a long-term commitment, serve your purpose? That’s a question you must ask yourself.
And here’s the most important one. Do you have enough insurance? The answer is no. And how do I know that? Well, that’s the correct answer for a vast majority and so statistically speaking, this is likely to be your answer too. The strange thing is, in my experience, a lot of people know how much premium they pay to insurance companies, but do not know what their family will get if they were to die. Actually, it’s not strange because the life insurance business is optimised around taking money and indeed, measures its success not by how much its customers are insured for, but how much money the customers pay. It does so by ensuring that a vast majority of products are not insurance but expensive and opaque investment products that have a small smattering of real insurance as a statutory requirement.
The bottomline here is that the basic principle to be followed while buying Insurance is to keep your insurance and investment needs separate. The way we understand that our relationships are important and since there is no relationship Insurance available – just in case someone steals your significant other, we better settle down for the one that’s available.
(Ifthikar Bashir is a freelance Financial Advisor.)
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