No Concern For Cover- ( Term Insurance)

Source: Dalal Street Investment Journal.

It is essential to ensure that the insurance life cover or sum assured is large enough to compensate the loss of income of the departed person. Yet, a majority of people don't give this enough thought, observes Jay Sampat

KEY POINTS

Most Indians believe that insurance is more of an investment rather than a fee being paid to secure ones family from any unforeseen events.

Individuals need to allocate certain portion of their savings to buy pure term plans that guarantee adequate cover on life.

With the increasing levels of risk we face in our day-to-day life, life insurance has become a necessity. However, unlike the popular belief that one should have more than adequate insurance in case disaster strikes, insurance cover in India is inadequate in most cases. Data reveals that in a country of billion plus people just about 26 per cent are insured. What is even more worrying is that even among those insured the total cover is too insignificant to prove useful.

For instance, for an individual earning say about Rs 6 lakh per annum, ideally, the sum assured should be an amount which if invested would at least generate an income of about Rs 3.5-4 lakh annually. Assuming the interest rate of 8 per cent, this individual thus needs a life cover of about Rs 50 lakh, (generally 7-8 times the annual income), to ensure that near and dear ones are not forced to alter their lifestyle dramatically in the unforeseen event of the death of the breadwinner. This assumption is, however, purely theoretical and far removed from what actually happens on the ground.

According to the annual report of the Insurance Regulatory and Development Authority of India (IRDA), the total amount of sum assured (life cover) taken by all citizens of the country together is about Rs 24,00,000 crore which constitutes approximately 26 crore life insurance policies. This means that on an average, the sum assured per policy is over Rs 90,000. Hence, if one were to assume a family of 5 members, the average annual income per household would be an approximate sum of Rs 2 lakh - given the per capita income of Rs 38,000 for 2007-08. As most Indian house holds have just one breadwinner in the family, the current amount of average sum assured fails to cover even half of the average annual family income of the country. This statistic is truly appalling.

Why have Indians refrained from ensuring a comparable cover on their lives despite a rise in living standards? The answer lies in the belief held by most Indians that insurance is more of an investment rather than a fee being paid to secure one's family from any unforeseen events. It is for this reason that there has been a high demand for products like unit linked insurance plans (ULIPs), endowment and money-back plans in comparison to term plans. One of reasons for this is that a pure term plan does not provide any returns in case the policyholder survives through the term of the policy - all premiums being paid treated as an expense to cover the life of the insured.

Policies other than term policies are designed to provide not only an insurance cover but also serve as an investment avenue. The premiums paid are thus returned to the investor, on completion of the policy term, with very little or no returns. Thus, while one does feel good that the money spent is returned if one survives the term, yet, as the incomes are limited, the individual ends up taking a negligible life cover thereby defeating the very purpose of the exercise. For instance, in a term plan from LIC, an annual premium of about Rs 5,000 can fetch a life cover of Rs 15 lakh for a 30-year old healthy male individual. The same amount of premium will however buy a life cover of only Rs 1 lakh under the endowment and Rs 75,000 under the money-back plans.

Thus, for an individual being able to afford Rs 5,000 as annual premium and then buying an endowment or a money-back policy clearly implies buying an investment and not insurance. In fact, it is this mindset that has resulted in the rush for ULIPs in recent years. While these products promise high returns that are linked to the equity markets, the amount of life cover provided by them is negligible in most cases. Most ULIPs available in the market today offer a life cover equal to five times the amount of first year premium. Thus, a premium of Rs 10,000 would mean a life cover of Rs 50,000 only. These days there are, however, a few ULIPs from the likes of Metlife (Tata AIG) which provide cover up to 40 times the annual premium.

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