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Insurance for insurance sake

A term insurance policy is insurance for the sake of insurance. Read on to know why...and more.

Kairav Shah

26 Sep 2008

You are a proud owner of a Honda Civic. Like all proud owners you have taken an insurance policy for the car. The insurance policy is of an amount that ensures that if the car is a total loss (in an accident or it is stolen) you will get enough money from the insurance company to make good the loss.

When it comes to your life, do you take the same precautions as you did for your car? Remember, unlike a car, with your life you do not get a second chance. Have you taken enough life insurance to ensure that if you die too early your family will get a sum that will ensure that they do not have to make any adjustments in their life style? As a broad rule of thumb, you should have life insurance equal to at least 10-12 times your annual income (for a more detailed calculation of how much life insurance you should have please use the insurance planner calculator available at www.apnapaisa.com/insurance.
Here is the link: http://www.apnapaisa.com/insurance/insurance-advice-india/insurance-planner-calculator.html.

Most Indians just do not have enough life insurance that will satisfy the above criteria. In their defense they will claim that they cannot afford to buy that kind of life insurance amounts for themselves.

But this is a fallacy. Let's turn again to the car insurance example to understand why.

For the car insurance, at the end of an uneventful year, the renewal notice arrives in the post and you pay it. So it goes on and on till you sell that car. At that time if you have had no occasion to make a claim you consider it as your good fortune. You obviously do not rue the money that you spent on your car insurance and do not look for a return on the money spent on your car insurance. Obviously while fixing the premium for such car insurance the insurance company does not have to build in this element and hence the pricing is low.

However, most people have a very different behavior when it comes to life insurance. They still want to get something back if they do not die during the policy term. Most of us still consider insurance to be a tax planning tool and not as something that will help our family in case of our death. And when we decide to purchase insurance, we instinctively go for the "maximum bang for the buck" strategy, mixing our insurance and "investment" needs. The surging popularity of Unit-Linked Insurance Plans (ULIPs) is a classic case in point. Our instinct tells us to ask, "If I am paying this much towards my insurance, what am I getting in return?" What they do not realize is that whatever they get in return is only from what they pay. The price of any life insurance plan that provides returns will obviously be much higher than if you were to take a plan that pays out if you die (called a term insurance plan) but otherwise pays nothing (much like the car insurance).

It seems genuinely hard for most of us to grasp the concept of insurance as purely a death cover. A Plan B that will ensure that even if we, as primary wage earners in the family, are no longer there, the insurance payout that we paid for during our lifetime will ensure financial stability for our family.

If we were to indeed give maximum weightage to this latter aspect, our predilection for "getting something in return" from our insurance policy will cease. The result will be that more and more of us will realize the best insurance product is the one that only covers the risk of death i.e. a pure risk cover.

A term insurance policy is insurance for the sake of insurance. Taking a term policy means that you are declaring to the world:

"This instrument is ONLY in case I am not there to support my family. For saving money, creating wealth, reaching my financial goals such as my children's education or increasing my wealth during my lifetime, I shall take advantage of the very many pure investment tools that are available."

Because a term insurance plan doesn't try to disguise as an investment plan or any other savings tool, it is the cheapest form of insurance. In effect, you pay the least towards maximum cover. This allows you to be adequately protected against the risk of death.

There are compelling reasons why you should adequately cover yourself, and not just use your insurance as a tax-saving tool.
New illnesses and diseases appear every day. The chances that you could contract something terrible and hand in your card have never been as high. You need to ensure that whatever happens, your family isn't left holding a near-empty pot of gold.

The insurance payout your family receives in the event of your demise has to last them a long, long time. Which means you need to be insured for a large, large sum. Which type of policy do you think will give you such a large coverage at low prices?

The term insurance policy that you take is a necessity for your family. Do not make the mistake of considering it a luxury for you and sacrifice it! You NEED to have a term insurance policy. Let's put it this way - the knowledge that you have adequately provided for your family if you die, will give you great peace of mind...and increase your longevity!

Or, as the punch line in an ad from a leading insurance company says "Jeetey Raho!"

Here is a comparator that displays term insurance premium amounts for various insurers. The premium amounts are for a typical male, 30 years old, for a sum assured of Rs. 50 lakh.

 Insurer   20 years
25 years
 30 years
 AEGON Religare
 Level term plan
 Aviva  Life Shield
 15600  17650  20300
 Bajaj Allianz
 New Risk Care
 18202  19270  20955
 Birla Sun Life
 Term Plan
 13876  14719  NA
 HDFC Standard Life
 Term Assurance
 14000  14650  16550
 ICICI Prudential
 Life Guard
 13486  15028  17497
 ING Vysya
 Term Life Plan
 12494  14591  17430
 Kotak Mahindra Life
 Preferred Term
 11011  12584  14775
 Amulya Jeevan
 12850  14600  16800
 Max New York Life
 Level Term
 13550  15250  NA
 Met Suraksha
 12800  13800  NA
 Reliance Life
 Term Plan
 11000  13350  16200
 Sahara Life
 Kavach  17945  NA  NA
 SBI Life
 Shield  12019  14566  NA
 Tata AIG
 Life Line
 12100  13200  NA
 Bharti AXA
 Secure Confident
 11950  13250  NA