Do they need life insurance: First Story

A few days ago I had given 3 interesting scenario with the question: ‘Do they need life insurance?’. Here is the answer to the first story.

Am summarising the story for those who came in late…and those who do not wish to go searching for the story:

Mr. Rajesh is a well off builder. His net-worth is greater than Rs. 20 crores, but less than Rs. 30 crores. Most of his assets are in buildings, rented properties, and of course has debt assets and equity shares. His equity portfolio is at the mercy of a few of us so he keeps bouncing ideas of some of us. He is 49 years of age, had inherited a part of his assets but has grown it at a good pace and continues to do so. His annual income is about Rs. 3 crores. He has one son helping him in the business and his wife is a home-maker. Their annual expenses are in the region of Rs. 10,00,000.

There are many views of how much life insurance Mr. Rajesh needs:

1. From a practical point of view: If life insurance is to provide for income to run the family expenses, obviously he does not need any life insurance.

2. From an agent’s point of view: He needs at least 10 times his annual income as life insurance. So he needs about Rs. 30 crores of life insurance. He could take about Rs. 25 crores as a term insurance and about Rs. 5 crores as a ULIP plan. For this he will have to pay a premium of Rs. 50 lakhs a year for 5 years after that the premium will vanish (agent may vanish before that !!).

3. From the insurance manufacturer’s point of view: the pitch would be as follows : “Sir, your father gave you Rs. 4 crores as an inheritance, you should be able to give your son at least Rs. 40 crores – this takes care of inflation. Since you already have Rs. 20 crores, there is a gap of Rs. 20 crores. This vital gap can be met only by a life insurance policy. Please take a whole life plan (it is tax free when your nominee receives it). You should not take term – that is for poor people not for rich people like you Sir.’

Actually what happened:

He called me. I laughed. I spoke to his wife and asked her ‘How much money do you think your husband has? She said maybe about Rs. 1-2 crores plus a house.

I told Rajesh ‘You need to teach your wife some basics of finance, make a will and ensure that you have enough money in a bank deposit which your wife can access even if you or your son are not around. You need to create a trust which a couple of us who can manage your money in a worst case scenario of you and your son dying leaving behind your wife. If she is unwilling to learn FORCE her to learn. Other than this you do not need anything.’

His relationship manager should be hating me I think….what is your feedback?

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3 Responses to “Do they need life insurance: First Story”

  1. Insurance is not just life or general insurance – it is a risk reduction tool. So teaching your family members some of your money management skills is also a risk reduction exercise. Similarly teaching his son lots of things about personal finance and his own business is also risk reduction.

    I agree that if you are a salesman with a target – this client looks too juicy :).

  2. Business persons making 3 crores annually are too smart to fall prey to such agents!! Thats wat i think.

    These guys will do the math abt money so quickly they dont even need a ‘back of an envolope’ as engineers need!!

  3. Vaish

    Another risk reduction tool – 30 – 45 minutes brisk walk in the morning – as important as (perhaps more important) term and health insurance.

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