The purest form of insurance is term insurance. This covers the risk of death of the insured, so as to provide the dependents with a financial safety net. Inspite of the extreme importance of this kind of cover, it is a plan which is rarely sold by insurance agents.
Why do you need term insurance?
In economic terms, the value of human life is equivalent to the amount of money it generates for the family unit during the lifetime. If this life is lost, there will be economic loss to the family unit. Insurance transfers this risk of loss of life in economic terms, to the insurance company. To understand this better, let us look at an example of Mr.X
Net Income: Rs.30000/- pm
Retirement Age: 55years
Loss to family unit in event of death of Mr. X
=30000*20*12 = Rs.72,00,000/-
No increase in salary for the entire duration.
In simple terms, if X dies today, his family loses the unearned income of Rs.72,00,000/- If insurance cover is not sufficient, the family will suffer financially. If he has a cover of Rs.41,00,000/- which is available to his nominees on death, they can invest it at the rate of 6% per annum to get a monthly income of Rs.30,000/- for life.
This is a very simplistic explanation of the matter. There are several factors which have to be taken into account for arriving at the optimal amount of insurance required. Some of these factors are anticipated increase in salary over the earning years, effect of inflation, increase in lifestyle, number of dependents and their requirements, any liabilities and inheritances etc.
If you look at the pattern of purchase of insurance, most people will not have policy/policies which provide this kind of risk cover. People usually purchase insurance with a sum assured of Rs.1/2/5 lacs. These are mostly products which give returns on survival/maturity. The premiums are usually high. In case of term insurance, the premiums are low and provide a high risk cover, but there are no returns on survival/maturity. In case of death, it is the sum assured plus the accrued bonuses that are paid. In case of Mr. X, if he has a policy of sum assured Rs.500000/- , in case of death his nominee will get a lumpsum of Rs.5,00,000/- plus the accrued bonus. In his case this will clearly not be sufficient for his family to live comfortably. If a term cover of higher amount was taken, the family would be in a better position.
This shows that it is essential for every earning member of the family to have a term insurance plan in place. Other insurance products like endowment, money back, whole life plans etc can be considered for specific cases, but only in the class of illiquid debt instruments.
Why Term Insurance is not commonly sold?
Some of the reasons for term insurance not being very popular are:
1. The premiums are very low, resulting in a lower commission. Thus the incentive of the agent to sell this policy is very less. So, if the customer is not aware, term insurance will never be sold.
2. There are stringent medical requirements for the customer taking a term insurance policy. Some people are very anxious on this front, lest they get to know of some adverse medical condition that they have- they believe ignorance is bliss.
3. If the standard health requirements are not met, there is a loading on the policy premium. This deters many people.
4. Most people like to have returns on the money that they invest. It is very difficult for them to see the huge intangible benefit of a term insurance policy. The benefit in terms of peace of mind for self and family, that in case of an eventuality, the family is financially protected.
5. Most people are unaware of the optimal amount of insurance they need. So more often than not, they keep on accumulating policies which may not suit their needs. In most of such cases, there is no awareness of term insurance.
So it is important to be aware of your need of insurance and the kind of policy that will suit the requirements.