Psychology of an Indian when it comes to Life Insurance

The moment someone wants to talk about life insurance to you, what comes to your mind?

–         Not again! I am already having many life insurance policies with me. How much more should I invest in Insurance. I need some other investment option.

–         I really don’t need insurance now, I can plan for it during the last quarter of financial year or my limit of Rs. 1 lac is over. Now I don’t need insurance policy.

–         How should I ignore this Insurance agent? Now he is going to chase me day and night

–         How much commission will this agent give back to me?

–         I am too young to have insurance

The above-mentioned are just few of those thoughts that come to an average Indian who has been asked to buy an insurance policy. The fact of the matter is that Indians have not understood purpose behind insurance.

Indians have understood Insurance as a Investment planning tool which combines the benefit of tax planning under section 80C and the maturity amount/ claim proceeds is tax free under section 10(10D).

Such policies are typically pushed by an agent,  who happens to be some relative/ friend/ acquaintance or he is some banker who chases him until he is forced/  under obligation to buy a policy. The main point is that agent is a sales person and is not really advising the client after knowing his full situation. Agents many times suggest what gives them the best commissions.

Many agents typically give the client, some part of his commission back as a sweetner because the commission in the first couple of year’s are high which the investor is ultimately bearing. The investor feels happy to have got some money back at the time of investment.

This is very normal for Indians and there is nothing which is amazing here. The sad part is that the questions which actually should arise in the mind of an investor at the time of taking insurance are just not asked. Typically, one should ask himself the following question:

–          What would happen to my family in case I am not there?

–         Are my disposable assets more than my liabilities?

–         Will my family be able to maintain the standard of living which they are living right now?

–         Will all financial goals of my family will be met if I am no more ?

These questions just don’t arise in investor’s mind. This has much to do with their  psychology. We keep reading sad stories every day in the news papers that such and such family has lost bread earner at a very young age and now deceased’s wife and small kids are left alone. Many a times, within our friends and relatives, we see that the family is in financial distress after an unforeseen bad incident happens to the bread earner.

We do feel sad and scared but after some time, these all remain just a story to us. We are just thankful that such bad incidents have not happened to us. But who knows, such an incident with you could be news for others!

This is what one needs to understand.  There are things which is beyond our control and we should be prepared for such untoward incidents and always have a PLAN B with us. By the way, most of the people don’t even have Plan A. but let us explain both

Plan A : Everything goes well and one is able to fulfill his financial goals out of his regular income and investment.

Plan B: If something goes wrong which we can’t foresee today, Insurance takes care of our Plan A.

So insurance basically is for eventuality and not for certainty.  The fact is that insurance is most needed by persons who have to travel the maximum distance and not for people who have reached their destination.

And here we would say that insurance is most needed by a youngster who has many dreams to fulfill but has miles to go. Just imagine, what would be the financial impact if a retired person dies at the age of 65 whose kids are settled with their own families. At this age, he would have achieved all he could achieve in life. Though the social vacuum cannot be compensated, financially the family is not affected.

On the contrary, just imagine what would happen to the family if a young person aged 32, dies due to unforeseen circumstance leaving behind a family of two very young kids and wife.

Now, here we would like to explain an equation which would clarify the actual need for insurance. Calculate the value of your Disposable Assets and your liabilities. Disposable assets are those assets which are not for your personal use and which can be converted into cash as they are treated as an investment by you. Your own house in which your family and you reside is an Asset but not disposable asset. Liabilities would not only include financial liabilities like home loan etc. but also social liabilities as daughter’s marriage, kids higher education, aging parents etc. Now you need insurance if “Liabilities are more than disposable assets” and one does not need insurance if “Disposable Assets are more than Liabilities”.

So when you are young, your liabilities are more or less known to you and you have yet not created disposable assets for you and your family. So one must take insurance when he is young. But what type of insurance? This is a big question. Manufactures (insurance companies) and distributors (agents) would always sell you what they want to sell. Though it sounds rude and tough on them, that’s the reality.

Which insurance policy to Buy? Term insurance is a pure insurance policy which covers your life risk at the lowest possible cost. The premium collected goes towards Mortality charges and there is no element of investment in this policy. Hence this policy is not only cheap but also helps you to buy large insurance coverage for a small amount. Insurance is a foundation of your Financial edifice. Without a proper foundation, there is always a danger of the superstructure collapsing and the entire family suffering in the bargain. We want to avoid that, don’t we?