A couple of days ago I got a mail saying “Insurance is a waste of money. I am 62 and never needed it”. It is such an amazingly stupid statement I could not believe it. ‘I’ have not needed it does not mean ‘nobody’ needs it. So it is foolish to talk like this. It can be extended to “Nobody has ever stolen from our house, so I do not need to lock it in the night” – sounds convincing? Or saying nobody in our house has been admitted to a hospital so I will not be admitted. Even worse “I have been seeing my Grandfather for so many years. He is 83 years old and has NEVER died, so he is immortal.” This is funny! Here are a few old thoughts on insurance – life or general does not really matter much!

Insurance – Life or General is largely about answering some questions like “What if….goes wrong”?

The fundamental objective of insurance is to provide a means to offset the burden of financial loss. Think of insurance as a premium paid for “transfer of risk” premium. An alternative method of dealing with risk. You are paying an insurance premium (small cost) to avoid paying the total cost for a catastrophic loss (such as your house burning down). So it is fairly obvious that you will not insure your mobile phone (you can afford to carry the risk on your own self) but will insure your house (the burden of this risk is too heavy to carry). So the house risk you transfer, by paying a premium. Mobile loss risk you keep on your own self. As simple as that.

A sound insurance program should answer the “what ifs” in your life. For example:

What if you were faced with a major medical expense? (health & illness insurance)

What if you were unable to work for a long period of time due to a severe illness or accident? (disability insurance and/ or critical illness insurance)

What if your most important employee dropped dead? (Keyman Insurance)

What if a fire destroyed many of your personal possessions? (home owner’s insurance)

What if an employee stole data from your company (D&O insurance)

What if you were involved in an automobile accident? (auto insurance)

What if you were to die tomorrow? Who will protect your income flow? (life insurance)

So if there are some more “What if” kind of questions….just see whether the risk can be measured. If it can be measured, it can be transferred. Transfer costs money (premium) and the benefits are – the insurer will pay all genuine claims. That is all.

If you are confused about which Unit linked policy to buy, buy term insurance. Choose the cheapest one for a term that covers your working life. If you are 33 years of age and will work till your age of 55, you need a 22 year term plan. Check out Birla Sunlife, LIC, Hdfc Standard Life insurance, Kotak, Religare, SBI, Icici Prudential, Max New York Life, Aviva, MetLife, ….does not matter choose the cheapest term insurance. If you are still not happy with leaving money in your bank account..go and get a Unit Linked Plan or a Whole Life Plan or an Endowment Plan or a Moneyback Plan!

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  1. The awareness about insurance is low in our country. Most people ‘invest’ in insurance policies for tax savings alone. For them, it has nothing to do with mitigating risk; in fact, the life cover obtained from the ULIPs that most people invest in is grossly inadequate to protect income flow to their family in the event of death.

    I am interested in understanding the formulas that financial advisors should use when estimating life cover and retirement planning — based on net worth, expected inflation, life expectancy, and income.

    My own thoughts about this is that a working person who saves a certain percentage of his income will need a decreasing life cover because the value of his accumulated assets go up, and his long-term debt goes down. After a certain age, when children are of age, one probably does not need life insurance as much as a regular pension income.

    I would go with multiple term insurance policies taken very early in life, which can be discontinued along the way based on actual needs. A health insurance plan for the whole family is also a necessity. One should also have life insurance cover for long term debt — home loans et al.

    I would like to hear more about these from you. The average insurance agent peddles the ware that makes him the most in commissions, so term insurance policies are not mentioned, ever!

  2. Subra sir

    from where to get the data -how much % the Insurance amount is not given to nominee because of some Isuues for different Life Insurance providers

    becuase that is also a risk -if the insurance company is losing money -so there can be 100 reasons to reject the claims

    May be if you give inputs on the same In your next blog it will be great

  3. Insurance companies will not go broke since they need to have capital adequacy ratio as per IRDA guidelines,this takes care of insurance companies losing money.in fact they need to maintain captial upto twice the amount of total sum that they insure for thier customers.

  4. Dear Subra..

    I have heard even stupideer (bad English I know) statements – I personally do not benefit from life insurance, only my wife and kids do, that too after my death! So why should I invest in it?

  5. Subramanian,

    I haven’t yet figured out what exactly you are trying to get at. Here are few of my findings –

    1. cost of research is high.
    2. products need to be sold no matter whether they are worth being in the market or not.
    3. Poor people need insurance but cannot afford it. too much red tape does not permit them to even come close to analysing their requirement.
    4. the rich are only mitigating a certain element of risk. it does not make a difference to them.
    5. Agent driven industry – only interested in the best commission. actual need requirements are not met.
    6. Returns provided by insurance companies are very low making the products very unattractive resulting in difficult selling.
    7. why do companies have so many products with the same offerings. why are certain products taken off the shelf.????
    8. What is IRDA doing about the customer/client needs ???
    9. ULIP’s are not ment for ordinary people. Using the facilities provided are very cumbersome. why aren’t agents allowed to operate as broker for the customer so that these services can be directly handled through online transactions. the end result is that the customer loses out on the timing.
    Ivan Benn

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