What is Insurance & why we need Insurance is normally misunderstood by Indians. Most of the time, when we ask any investor about his investment portfolio, he/she invariably lands up saying that we have investments in some sort of insurance policy in LIC, ULIPs, Endowment Policy, Money Back Policy etc. In fact, over the last 50 years or so, LIC has taught Indians everything other than insurance. We all understand insurance as Tax Saving Instrument, Investment Tool but do we understand Insurance as Insurance. You must be surprised by our sentence, but that is the hard core fact of life.
What is Insurance?
It is a contract between the insured and the insurance company whereby the insured financial risk is covered by the insurance company. The risk can be of your vehicle, property, legal etc. So effectively, you pass on the risk to the insurance company and they charge you a nominal sum of money for taking that risk which is called Insurance Premium.
Why Insurance?
It is said that Rama, Krishna, Bhishma and Buddha, knew the time when they would leave this world. To put simply, each of them come to live with their disciples with a mission or set of responsibility to fulfill. Does any one of us know when something will go wrong with us and whether that time our responsibilities to fulfill. Does any one of us know when we something will go wrong with us and whether that time our responsibilities would be over or not? We all know that in life unexpected is always expected. Our life is full of uncertainties with lot of goals, short term goals, long term goals, known goals – unknown goals. We are all born with some responsibilities to fulfill…..but we do not know how much time we will get to fulfill those responsibilities.
What if anything goes wrong to us, who will provide financial security to the family. Who will fulfill all the dreams that you would have thought for. This is where insurance can help you. Insurance is one of the greatest inventions in the field of personal financial products. But it becomes fatal to financial life and costly once you end purchasing a wrong insurance solution.
What Happens in Real Life?
The answer to this lies in 2 questions “why did I buy this insurance” and “what product I bought”. Typically you buy insurance product as investment and not insurance. That is why we say that Indians have actually not understood insurance in the right sense. First of all less than 5% of the Indian have insurance policy and add to this, out of those who are insured, the average life insurance cover is less than Rs. 90000/-.
We all understand insurance as an investment and land up buying EXPENSIVE Product. We all buy Endowment Money Back. ULIPs etc. Now when you buy an expensive product, you will actually be the loser and the manufacturer and the middlemen will be the winner. Is it not? All one need is to have a simple Term Insurance Policy/ Term Life Insurance Plan.
Mixing Insurance & Investment
Mixing insurance and investment is something we should totally avoid. When your insurance agent chase you, does he sell you insurance products? Or does he offer you investment opportunities and tax- saving schemes? In 99 of the 100 cases, agents don’t sell pure insurance. The insurance agents are driven by the first year commission that they get and they are hardly bothered whether or not it is really right for you or not. In fact, that is the reason, why most of the investors we meet, say that they don’t see their agents after first premium. They make heavy commission by selling the product. Now we don’t have to explain that the commission that they make is actually deducted out of your investment and it could be as high as 70% of your premium.
Insurance is an Expense
Let’s try to answer the question through a analogy. Do you know that the world’s tallest building Burj Khalifa at Dubai, which is 828 meters high and has a foundation of 320 meters below the earth level made out of concrete and stainless steel. This means that to see a masterpiece you need to invest in its foundation. And we all know foundation has no visibility but it is a major part of cost. So any expense which gives a foothold and act as a security towards unforeseen circumstances, is worth spending.
Similarly is life insurance. We all must buy a simple insurance even before we start thinking of investing for future. Understanding insurance as an investment or mixing insurance & investment is not a wise decision.
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{ 58 comments… read them below or add one }
BANN THE LIC TO SOLD ULIP
@ dd
SEBI is fulfilling your wish.
You must be crazy to have such views.
Did you have a look at the traditional endowment plans that we used to have earlier and still have around us. Did you ever have a look at the returns that one used to get from them and what returns can you expect from them even now?
Ulips are expensive then MF but they are much much much better than other endowment plans. Try to understand these plans and do not just bash ULIPS just for the sake of participation in ULIP bashing binge.
It is important to understand importance of insurance in once life.
very well written with nice analogies. Insurance that is being sold is truly not insurance. Having worked in a private sector bank, I can truly relate to the message of this article. Insurance is one of the longest and most successful frauds being conducted. the marketing and advertising of some of the inurance companies is the best in the industry with a great emotional connect (child’s education, daughter’s wedding, etc)
Dattaraj
Thats a great point you have raised . Companies advertise on themes which is like dreams of tyical indian mindset , like have a great retirement without any ones support “Sar utha kar jiyo”
. Pure emotional exploit .
Manish
@ Manish
Punchline of Canara HSBC lifeinsurance “Insuring your Emotions”.
@ Dattraj
Thanks for sharing your experience.
Insurance agents & banker try to do “Emotional Attyachar” but client think this is in his benefit. LOL
Hello,
It is true that Insurance Agents are there to earn money. Even in my 30 years of life I have never met any agent who talked me about Pure Term Plan. I myself become an Agent and I am selling only Pure Term Insurance. I beleive a person must have a Term Plan in his portfolio which should be atleast 7 times his total Annual Income.
Good Article.
Hi Nilesh,
Well said i am looking for a term plan can u advise let me ve y contact details if possible.
Thnx
Dear Nilesh,
Good to know that you are following a prudent practise of selling only pure insurance. We still feel that agent shun from this topic and avoid this discussion. According to me being silent is also encouraging expliotation. That is the reason we are reaching masses to keep this point. If you have any idea, which we can follow to curb mis-selling in insurance, do let us know.
Nilesh Panchal is according to me “A TRUE INDIAN”. Even I have been running from piller to post to see an agent who can convince me about a pure term insurance product. And in 2004 I came across a comparison ( in a well known personal finance magazine with more than 10 years reputation now) of then available pure term insurances offered by a dozens of insurance companies including LIC.
I could zero in with a term product offered by SBI life, in which the sum assured get increased by 50% after every 5 years with out any change in the premium amount.
We need agents like Nilesh Panchal to educate the 95% of the Indian population who lack insurance literacy.
Thanks Ajith for sharing your story, hope readers will learn from it.
Mr.Ajith, it goes without saying that SBI advisors educate their prospective clients on the right kind of product required by them. However in the past there was only one company and that was LIC. In every street there is an advisor and due to competition between advisors many a times misselling took place. With Insurance sector opened up in India, advisors strength multiplied and more competion rules the day. One has to be true in his profession, what ever it may be. For example at SBI Life we are taught how to sell a product in the right manner, no sugar coating, no emotion selling but bring out the facts – say for example if we propose a Child Plan for educational purpose we tell the prospective father what would be the cost of education 10 years from now or 11 years or 12 years depending on the childs age and inflation of 6% to 7% and tell them what the plan is about and how it would help the parent to meet the future requirements. No force selling or sweet selling or emotional selling. Its pure fact selling. That’s SBI. I am proud that I am part of SBI Life.
sir i want to insure my life worth 1 caror
so please suggest me hw to get term insurence & mediclame
mahan
very well said.I like all your article.All are very helpful and easily understandable.
Thank you.
Thanks Ankit
Is insurance endowment a good investment tool?
I regularly reads your blog, it’s really good. I want to know about SBI subh nivesh policy(If I invest 20000 in it for 10 years). I also have ppf account & Rs 2000 mutual fund SIP.
Hi Aditi
It’s good to hear that you are regularly reading our articles & upgrading your knowledge. But it was bit sad that still you are asking details regarding an insurance policy for investment purpose. We always keep saying that one should not mix insurance with investment. SBI insurance Shubh Nivesh is an endowment plan where only added feature is you can convert it in whole life policy. Expected returns will range in between 5-6% which will not be enough to even beet inflation. My suggestion is you have made a good portfolio through PPF & Mutual Fund SIP keep adding money to it rather than trying new things. As you are planning to invest Rs 20000 – you can start one more SIP of Rs 1000 every month, take term plan for insurance need & put the remaining amount in PPF.
I have Bajaj alliance. ULIP unit gain since 2007 Premium 10.000/- ULIP ki tulna me ye kaisha hai? Mujhe esko surrender or premium continue karma chahiye ya nahi?
Hi Vedprakash
ULIPs are expensive and complicated investment products. The investment is similar to mutual fund products and policy holder is allotted units based on which his returns are calculated. An investor seldom understands the language and set up of ULIPs, whereas mutual funds are far easy to understand. When you purchased that policy there were high upfront commissions of 40-50% this means that there is high probability that your total fund value will be still lower than your investment. My suggestion is you should immediately discontinue this policy – if there are no surrender charges withdraw you amount & start investing in mutual funds.
Hemant it is not true that Mutual Funds are far better than ULIPs. When u purchase a Mutual Fund which invests in equities, u stay put in it. NAV rises when the market is in bulls phase. When the market starts falling your NAV is pulled down day by day, the Fund manage has to reshuffle the portfolio of equities else no chance of rising NAV. On the other hand if you would have invested in ULIPs in a good insurance company you would have had the choice of different kinds of funds in which you can switch over from time to time. In my view ULIPs is for a person who has a risk apetite and knows about equity market or good advisor friend who can advise him from time to time. Alternatively ask for all details before investment (browse net) before investment and stay put for a minimum of 1 full cycle of UP and DOWN that is atleast 6 to 8 years. If you want your investment to be safe then choose the Guarnteed funds. However if you want to play safe only tradational products are the best. For further information I would be happy to inform and available on +919043431060. Regards
Hi
It is very painful to see that lakhs of people loosing their hard earned money on these types of plans, which are not at all beneficial to the customer. In such cases, the customer is not getting adequate insurance cover, eventhough he is paying huge premium year after year. I fully agree with TFL that insurance should be treated as an expense only and not as a savings.The customer should first go for a Term Assurance of a decent value and then start saving as per the asset allocation, matching his profile. This will ensure enough financial security to the family in both the situations, ie . if he is alive or dying in between.
Thanks Melvin
Hi,
First of all i think i’m lucky to find your blog the same time i start earning! I’m 25 now, want to start a term insurance plan. Sbi life or lic? Do they cover only death or permanent disability also? Thanx
Thanks Hemanth.
Take term plan only if you have dependents. I assume that you are not married so if your parents depends on you only then you should take insurance.
You must buy mediclaim & comprehensive accidental policy. Read this
http://www.tflindia.in/2010/12/investment-young-people.html
Hi Hemant,
Great article.
I have a Metlife insurance policy with a cover of 1cr up until 99yrs, where I have to pay a yearly premium of 5lacs. This I was told can do for 3 years and then discontinue. I was quite wary of the charges and hence tracked it, out of the first premium around 4.7lacs were invested, hence I thought it was a good deal.
Also, I selected the fund type for this ULIP to be in Moderate type (i.e. Debt funds), as I wanted the capital to be secure and did not expect to get huge returns from this.
I understand that to be able to get the 1cr cover, my total value of the policy should be 120% of the first year premium, hence I plan to discontinue the premiums after the 3rd year, as it will take care of the above.
Can you please advise if I am on the right track of have to go for a term plan still.
Thanks
Hi Hiten,
You have not mentioned the name of the product but I think you are talking about whole life ulip. I don’t want you to disappoint but as you have asked my advice – I should explain you few things.
Expenses: You have mentioned that only 30000 was deducted as allocation charges in 1st year. But this not the only charge you have pay list is too long but specially check the policy maintenance charges.
Insurance: Insurance is taken that if I am not there my income is replaced. But tell me why we need it after your retirement.
Cover: It’s good that you have taken a 1 crore cover but if you would have taken it through term plan it would have been 12000-20000 per year(assuming age 30-32). One more thing what I can see is 1 crore is not sufficient for you – as you are paying Rs 5 lakh premium you must be earning Rs 12-15 lakh per year.(not less that) In such case your cover should be Rs 1.5-2 crore.
Investment in moderate fund: When your horizon is upto age off 99 what’s the use of keeping this fund in debt – you can aggressively invest in equity.
In case you have any question feel free to ask.
Dear Hemanth,
I have read all of your articles on insurance and investments, i pretty well know that Insurance + Investment is Junk. But i was not able to convince him that TATA AIG MAHALIFE GOLD is not a good plan. I would request you to put some light on TATA AIG MAHALIFE GOLD plan.
Thanks,
Bharath
Hi Balra,
If you are happy with 5-6% returns it’s a great plan to have.
Dear Mr Hemanth,
Your explanation is precise in regard to Insurance as an ‘Investment and as well as Insurance’.
Its an eye opening to me about the real fact of insurance agents!
Sir, could you please elucidate the difference between insurance agents and broker. I shall be grateful.
Regards,
Emmanuel.
Hi,Hemanth
Its a great initiative to educate customers on what is good investment and what is not good.
.But I clearly see that some of the statements are superficially made and doesn’t have any back up .for example No ulip in current market is giving a commission of more than 8% and the average industry commission for the first year is 5% .From the second yr its between 1-2 %. You talk so much negative about ulips only because, how they have been sold in last 5 yrs . but if you suggest them rightly they are better instruments than MFS. If you check last 5 yr performance of top ulip funds and top MF Equity funds .ULIPS are better performing funds .If you take a time horizon of 15 or 20 yrs ,
ULIPS beat MFs in their expense ratio,MFs expense ratio is 2.75%-3% where in ulips expense ratio is between 1.5%-2%.No doubt MFS are good in short term but If you take consideration of the facts like lower FMC ,the flexibility of shifting your investments between different asset classes with in the same product,if you are looking to create corpus for your long term objectives like retirement corpus or child education, the current class of ULIPS stand a fair chance as an investment. Finally why dont you question the MFS to show their charges as transparent as ULIPS . The biggest charge in these both investments id fund management charges .Please compare two similar investment amount s one into ULIP and another one into MFS . Keep the time horizon as 15 or 20 yrs then pls check the charges effect on net yield of the both the investments.
Hi Vijay,
Just check when this article was published. And still expenses are not less in ULIPs.
And what about other limitation where you have stick with particular insurance co. even if its funds are not performing.
I totally agree with your views. Insurance must be taken as an expense instead of investment. I am glad to find this article.
Insurance is a safety net. In monsoon when we leave our home, we carry umbrella or raincoat. It may not rain at all, but if it does it will keep us dry. We need to look at insurance in the same way – a safety net to keep us and our loved ones protected against life’s uncertainties.
Hi Hemanth,
Its a good article.
But I want to make a point here and that is the Indian mentality.
Indian Investor would like to have some return on the Investment which he pays towards Insurance as a Premium.
Insurance agreed have a Front end charge but if the entire policy term is complete it will still work ou cheaper ( in case of ULIP ) as compared to Mutual Funds.
Insurance as a Investment will ensure financial Discipline among the Investor.
As you said there are no free meals hence the works in Insurance, Insurance might cost bit higher than other Financial Instruments but its beneficial in a long run therefore the decision need to be left with the individual what exactly he needs do with his money.
Hi Hemant,
Life Insurance offered by ICICI. I have heard about ICICI term plan which is popular by name as “ICICI Pru iProtect” but when I visited the website and found below Term Plan Products:
ICICI Pru iProtect
ICICI Pru Pure Protect
ICICI Pru LifeGuard
ICICI Pru Home Assure
I didn’t understand the exact difference in these four products/plans.
I don’t understand why there is much difference in premium per annum in these four products while the company and product is same the only thing is plans are different. But I din’t understand what is the beneficial difference in these four plans. Can you please help me to understand so that I can choose the correct one as per my requirement and go ahead as soon as possible.
Kindly advise for the “ICICI Pru iProtect” – Option II
This plan offers term life insurance as well as additional accidental insurance.
Regards,
Ashish
Hi Ashish,
iprotect in online term plan & home assurance is to cover home loan. Other 2 are differentiated on maximum sum assured one can take.
My suggestion will be to have a term plan without accidental rider.
Hi Hemant,
Thanks for the reply!
I got your point that one should go for two different products (1) Life Insurance – Term Plan (2) Accidental Insurance. One should not mix these two products like many people mix Insurance and Investments (ULIPs)
Well, I still have many queries :
(1) Can Accidental Insurance premium be considered for tax benefit under 80c or any other section. I hope, Health insurance premium is considered in different section than 80c. The same way can we avail the tax benefit for accidental insuracne?
(2) As you advised that iProtect is online term plan. What does it mean and should one avoid this product? If yes, why?
(3) ICICI Pru Home Assure is to conver Home Loan so one should avoid this plan for pure term plan life insurance perspective. Right ?
(4) ICICI Pru LifeGuard offers maximum sum assured of Rs. 10 lacs. So one should avoid this plan if he needs sum assured more than 10 lacs. Right ?
(5) ICICI Pru Pure Protect Classic offers maximum sum assured of below Rs. 25 lacs. So this is also not applicable for those looking for sum assured more than 25 lacs. Right?
(6) ICICI Pru PurePru Protect Elite offers sum assured with no limit. One can choose a sum assured of his/her choice. Kindly advise for this product plan. Is this right product to go for or not?
(7) I see that there is a much much difference in the premium for ICICI Pru iProtect & ICICI Pru PurePru Protect Elite. We just need to pay about Rs. 9000/- in case of iProtect and Rs. 20000/- in case of Pure Protect Elite. I feel that beneficiary benefits in these two plans are same as insured’s family will get the sum assured in case of death of insured person. Then why there is difference in the premium amout ? More than double. Why?
Kindly advise for this and forgive me if I am wrong anywhere.
Regards,
Ashish
Hi TFL,
Amazing article for beginners to understand what exactly insurance is in real context. Great going!!!
Regards
Bhawin
Hi,
want some details for LIC “Jeevan Saral” plan..
Hi,
A very nice and informative article on insurance it clears various fundas. Would request your advise on the following :
I am 40 yr old would like to take a 50 lac term plan ve shorlisted LIC Premium is Rs 33850 v/s Aviva i life is Rs 13547. The objective of term plan is to protect o/s home loans in case of an eventuality. Do u think one can take the risk with a new player like Aviva, stick to LIC or take a mix of both pls advise.
Pawan
Hi Pawan,
Its good that you are thinking for a term plan.
I will suggest you to go with ICICI – I CARE & Kotak Preferred E term plan online term plan which will take care for an eventuality (protection of home loan). I will suggest you to distribute equally to the above policy mentioned policies.
Yes, I think the risk can be taken with a new player but it will need your help as well because most of the claims are being rejected through the details provided by us in a policy form,if we provide the details in a utmost good faith the claim will not be rejected by the company.
Dear Mr.Hemant,
Why donot we look at this way. In term insurance generally no returns from the premium you pay but the risk is covered as adequate as required based on the premium. But an endowment product is just not driven by the commision, it also helps the insured to cover risk moderately and also get back some handsome amount if there is no risk for which it is covered. So why not we consider this just not as insurance but also investment to an extent. Imagine if one does not have a insurance policy taken, wud he not have spent that amount for either purpose or unpurpose expenditure. Today there are so many malls which have sprung up with the young population flocking towards them to spend unmindfully. I really do not know how many wud agree with me but this is how I see Insurance as a little bit of savings/insvestment as well.
Regards
Hi Sunku,
Before making any comment as a reply to your input, I would request you to go through this page article with the open and cool mind once again. I hope, there would no more need to reply your query.
Happy reading and understanding…
Regards,
Ashish
Hello sir,
I am 30 yr old ..working in mnc co. I want to invest Rs.2000/-pm… and I would like to know which policy is better…whether pension plan or mutual fund or life insurance… Pls sugest me’
Prasad-
994590000Bangalore
Hi Prasad,
Its good that you want to invest a sum of Rs 2000 and you should invest this amount through mutual fund for a long term horizon.
I have a 11yrs old son, I want to invest some money for him so that he can have some good amount in his 22/23 yrs old of age. One time Investment or annual premium, both are fine with me. I can Invest 50000 per year. Suggest me some plans. Thank you.
Hi Madhuri,
I will suggest you to invest your money through SIP (MUTUAL FUNDS) that will be the best route if you want to have this money for your child.Do not have child plans from Insurance company as they are cheaper and the expected returns are not more than (5-6)%.
Thanks tinks. I was also thinking like that but just cudn’t decide which one to invest.
Any suggestion ?
Hi Madhuri,
I m not the best person for this.
I will suggest you to have a road map which will leadyou to your goalsand that is possible by having proper Financial Planning & for this I will suggest you to Contact Mr. Hemant Beniwal
Hi,
I want to invest Rs.2000/-pm… and I would like to know which policy is better…whether pension plan or mutual fund or life insurance… Pls sugest me’
Prasad
Hi Prasad,
Will like to know from you what is the purpose of investment?
Great article! Any suggestions for the best way out of a costly ULIP (specifically HDFC Suvidha)? Wait it out for the 10 year term? Or withdraw as soon as allowed by plan (5 years)?
I would like to invest around 2k per month for tax exemption purpose and long term(10-15yr) good returns. Please advise me me . is there any gud mutual fund or pension plan or anything?
your article is a must read for everyone as misselling is rampant across companies. i bought a term plan from HDFC which was cleared by them after a looong time of deliberations by the under writers. i am a pilot in the air force and getting a term plan is virtually impossible for me as mosst companies get cold feet when they come to knoe bout my profession. The biggest problem with the human mind is that it starts calculating the amount one would lose over the term of the policy if he/she were to survive and associates the transaction as loss making. To this, my friend rightly put the term plan in perspective when we recently had a discussion with our colleagues who believed it to be loss making–he sais if you want to profit from it, then go and die. what say?
Hi Hemant,
It was nice reading all your inputs on Insurance planning, but I found in one of your reply tht you were suggesting Tata Mahalife policy I guess this policy is similiar kind of lic’s jeevan tarang, I guess even this plan is very expensive , instead we can use STP option in a Good Mf like a balanced fund. Still we can endup getting good returns of close to 11-12%. Tata mahalife & jeevan tarang are very expensive plans with long lock in periods.
Regards,
Mahesh Kumar P.
Bangalore,
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