Life Insurance – Make informed decisions

These days you often hear the term ‘investment advisor’ in India thanks to open skies policy of the Indian government in the insurance sector. There’s no doubt that completion has brought in lot of advantages to the customer but also it has brought in people who want to make money quickly at the expense of the customers. So this article is just an attempt for all the readers to think twice before you sign the dotted lines next time with your ‘Investment Advisor’ who is interested in selling a Insurance plan which meets all your investment needs.

Many people have conventionally bought life insurance plans mainly for investments, tax benefits and the life cover they offer.  No one bothered much about the returns what they offered and the structuring of their premium amounts as long as they enjoyed the tax benefits.

The primary objective of the life insurance is to secure the financial future of a person who is insured in case of eventuality. It does this by paying ‘Sum Assured’ to the nominee in return of payment of premiums.

The person buying the insurance decides the ‘Sum Assured’ at the time of buying the insurance plan.  The premium will consist of 3 components the knowledge of which is of great significance while selecting the any Insurance Plan.

1. Mortality charges – Mortality charges are incurred by the insurance company to cover the risk of an eventuality (Death) to the individual. The mortality expenses differ depending on the age of the individual and the ‘Sum Assured’.

2. Sales and administration expenses  – These expenses are incurred by the insurance company for operational purposes and recovered from the premiums that the individual pays towards his policy. Agent commissions, sales and marketing expenses and the overhead costs incurred to run the insurance business on a daily basis are examples of such expenses.

3. Savings component – This portion of the premium is invested by the life insurance company in various investment avenues like government securities (G-secs), bonds, money market instruments and equities in varying proportions. The savings component is what helps generate the returns which insurance companies pay to the policyholder by way of bonuses and the maturity amount.

The insurance market is flooded with large number of plans which makes the decision process more complicated and the ‘Agent’ will mostly try to sell a policy which brings him huge commissions.  Most insurance policies offered by companies fall under two categories. The different policies which are available in the market are the combination of these two kinds of policies.

1. Term Plans – these are pure risk cover plans. The premiums charged by term plans cover only mortality charges and administration expenses.  There is no saving element attached in the premium hence no maturity amount.  These are the cheapest form of life cover available to any individuals and premiums are decided by the age of entry of the plan and the term of the plan. ( to compare the term plan premiums across life insurance companies)

2. Endowment Plans – The premium towards an endowment type plan also includes a savings component in addition to the premium charged towards Sum Assured.  The popular type of plan sold under this category is ‘Money Back Plans’  and off late private insurance companies have familiarized  the ULIP (Unit Linked Insurance Plans)

So, now you should confront the question – which plan is better for my requirements and how do I go about selecting the plan?  I did a quick comparison for this purpose using the official website of Life Insurance Corporation of India by selecting  one plan each from term and endowment category. 

The following table shows the premium amounts for a man aged 30 years.

As the table shows if the individual decides  to buy a term plan for a sum of Rs. 1,00,000 for a 30 year tenure,  the premium will be Rs. 3,821 under the term plan and Rs. 41,206 under the endowment plan.

The difference amount of Rs. 37,385 is the saving component in the total in the endowment plan. What this means is that the term plan is 91% cheaper than the endowment plan in question. In other words the premium for the endowment plan is 10.7 times the term plan for the same amount of cover.

If you look at the past, the average returns from the endowment plans are in the range of 6-8% within the insurance industry. Even though the private insurers offer the higher returns though the ULIPs off late no one has proved the metal as yet. Please note that a higher exposure to equity through ULIPs is double edged sword which may increase your returns but at the same time it will increase the risks significantly.

As individuals we should not combine the insurance needs and investment needs together. It is always advisable and rational to go for the pure term cover to cover the life and balance surplus can be invested into Mutual funds, NSC and PPF and other avenues. The mutual funds have a tailor made plans to meet the investment requirements of all the individuals. They offer greater flexibility and provide quick liquidity to the investors.

My sincere request to all the readers is to follow some golden rules while considering a investment plan:

1. Start the insurance plan at an early age since the age factor is critical in deciding the premium amounts.
   
2. Do not ever consider Insurance Plan as an investment tool instead just treat as a risk hedging tool
   
3. Endowment plans are more suitable for a longer term; do not buy a insurance plan if someone tries to sell a shorter period plan (I myself met many advisors in Mangalore during my recent visit who were trying to sell me 3 year ULIP plans). The people who try to sell these plans are concerned only about their commissions.
   
4. Take help of the Certified Financial Planners in deciding the insurance plans, the fees you pay to the financial planner is well worth it.

One should read the fine print of the Insurance plans when they decide on a plan. The readers are advised to look into their personal needs and match them with their investment plan to meet their financial goals.  I strongly suggest the following articles on Economic Times which will be of great use for the readers. 

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Make informative decisions and money wise!

Disclaimer: All the observations made in this article are personal. All references to companies made in this article are explanatory and author does not endorse any companies engaged in the business.

The article is based on the information which is available on the public domain and which at the time of writing the article is assumed to be accurate and correct but the author does not take any responsibility for the authenticity of the same.

(Rupesh Lobo, Currently working as a Senior Financial Analyst for Signature Asset Management Company Ltd in Dubai, United Arab Emirates. (www.signatureamc.com). His interests are reading, travel and research. Rupesh has completed Masters in Business Administration with specialization in Finance. He can be reached at )

Author: Rupesh Lobo- Dubai