Two advertisements that I saw on television recently set me thinking. The first one is an ad featuring the cricketer Yuvraj Singh. It was (to my observation) not selling life insurance but a wealth plan or product linked to insurance.
The second one was one offering a “life” cover of a crore of rupees at an annual premium of a mere Rs 8,600. And you had to do everything yourself. No agents. Of course, an asterisk after the amount means that you have to read the fine print, but the message was clear. Here was a life insurance company inviting you to bypass the agent and take a life insurance cover for a nice round sum of a crore of rupees. It clearly sent home the message that should something happen to you, your nominee would get the sum.
Life insurance has been a much abused concept in India. Most insurers have been selling investment products with a dash of insurance thrown in. In most cases, the amount for investment would form bulk of the payments and nowhere would the customer know how much the commission payout to the agent would be. The amount that gets invested is after the deduction of the agent’s commission. The commission can range between 2.5 per cent and 40 per cent of the amount that you pay as premium.
Now, the insurance company that is airing the ad has dared to sell pure insurance. Use that as a comparison to evaluate when some agent offers you a ULIP or some such product. Take the premium for the life cover and then see what is left. If that amount is put into a mutual fund (where the total expenses are typically capped at 2.25 to 2.5 per cent of the investment value) you will get a better return. For Ulip, there are expenses such as agent commission and others. Assuming that the fund management skills are not vastly different, you end up being a winner when you opt for a pure insurance product and mutual fund for investment. The key to keeping a low annual premium is to go for a policy early in life. Do not wait till you get married or have kids. By then, the annual premium amount would go up. The younger you are, the lower the premium.
Coming back to the first advertisement with the sportsman, my first thought was that he is facing a huge medical expenditure. No life insurance policy is going to give that. For this, you need a medical insurance. It is possible that when you are in employment, you may have a benevolent employer, who offers a corporate health insurance that takes care of the damages. However, if you are not lucky enough to have a corporate cover, the only option is to have your own medical insurance. This is an expensive proposition, but we still go for it. And the amount we pay every year is an expenditure that we undertake willingly. Yes, we do get a tax break, but it is very likely that even if the tax break is withdrawn, we will go for it. It is for the uncertainties in the state of health. To my mind, the advertisement is more a wake-up call for people who still do not have medical insurance.
The key thing is to remember that insurance premium is a small payment for an event that can be financially demanding. If you mix it with investment, you end up a loser on all counts. Your insurance cover gets smaller and you do not maximise your investment returns. Think of medical insurance and life insurance premiums as expenditure. Both are discretionary spends, but sensible spends. Get smart with your money.