Insurance has been most abused area in Indian Context. Typically insurance companies have been appointing agents with “network”; read persons who have large social circle which they can exploit. These agents are paid steep remuneration and would rarely guide you about fine prints of policies and have tendency to lure you for the policies which carries higher commission.
This despite a useful product, an insurance agent, over the period has become a dreaded word. Insurance companies too, over the period, have introduced different models of repayment that end up confusing a consumer more than they guide. All such different products at the end leave similar yield of 3.5% to 5% and rarely more.
Before sharing my views on the subject in this post as well in few more to follow, let me first share my own experience. I lost my father while I was 17 with no cash reserves, no relatives to bank on and my mother too was not an earning member. At that time, my father's insurance policy did come in handy.
Thus, while Insurance has saved many homes during crisis, it remains most abused financial investment instrument.
Insurance premium are calculated and fixed by insurance companies based on many factors, such as their claim experience, average life span of individual etc. Till eighties, while average age expectancy of Indian male had improved to about 57 years from about 45 in fifties, still the premiums rates did not register corresponding reduction. Results, Government monolith LIC, despite political interference; loss making policies introduced for Political reasons; made lots of profits. This was followed by another era till mid nineties where while some good policies were there, common man had no expertise to select a good policy. Typically, a policy that promised good returns carried low incentive for the agent who had no incentive to sell or promote such policies.
This was followed by era, when private companies entered the field and changed the rules of the game. Government was forced to ban Fixed and guaranteed returns policies. In these days of free economy does it make any sense for government to intervene and instruct a company not to guarantee a higher sum which the insurer is confident of offering just because new private players would fail to match such return?
The funniest part that I have seen is when people take policy in the name of their child. Clearly this defies any logic and this is not a protection for your family. The money is payable only in case of unfortunate death if the child and not in case of parent. So whom are your insuring?
Now we are in an era, where you are given a proposal for insurance, which guarantees no more than 3 percent and has more in fine print than what is stated in clear terms. It has really become an area, where you need to select a policy under some professional guidance with professional definitely not the one who has any interest in your buying the policy. While no sub-limits for investment under section 80C for Income Tax Act, it has lost sheen for many assessees taking a policy to save income tax.
Now when a typical policy assures only 3 percent, actual returns too are not too attractive. Then what is best way to insure oneself?
Just see, Insurance companies too are largely investing their money in similar money market instruments as mutual funds, and while mutual funds can not afford more than 1 or odd percent as incentive to their agents, how come insurance companies afford about 20 percent or even higher incentive for policies, How do they earn sufficient on balance 80 percent left to reward you for Rs 100 of investment at comparative rates. Mind it, some part of the corpus, of insurance companies, has to be invested in very low yield Government securities.
Before selecting a policy to insure, just ask yourself which risk you want to be insured against. Do you want to insure against accidental death, medical contingency, natural death or any thing else.
In today's age, assuming you are 25 years old, the maximum threat to your life is from accident as life expectancy has gone up. See the following tables.
A typical Insurance Policy would give you Rs 34.72 lacs after 20 year tenure. The same sum, if invested in mutual fund, assuming annualized return of 15%, grows to a whopping sum of Rs 117.81 lacs. Same money, if invested in Bank, grows to Rs 63 lacs. It may be noted here that the in mutual fund / bank investments route in 12th / 15 th year, the money grows to equivalent of what insurance company would give you after 20 years.
Now, assuming, we need to insure against the accident risk, at the age of 25, annual premium of Rs 5000 would be enough for insurance of Rs 34 lacs. Balance money if invested in mutual fund and bank in equal proportions grow to Rs 81.61 lacs after 20 years and assuming threat to life happens from non-accident factors, in about 14 th year you are at par with insurance policy.
Following Charts are made assuming annual Investment of Rs 1 lac
|
Insurance Policy, assuming 5 percent annual returns, 20 year period |
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|
Year |
Opening Value |
Annual Premium |
Return |
Closing / Redemption Value |
|
1 |
0 |
100,000 |
5,000 |
105,000 |
|
2 |
105,000 |
100,000 |
10,250 |
215,250 |
|
3 |
215,250 |
100,000 |
15,763 |
331,013 |
|
4 |
331,013 |
100,000 |
21,551 |
452,563 |
|
5 |
452,563 |
100,000 |
27,628 |
580,191 |
|
6 |
580,191 |
100,000 |
34,010 |
714,201 |
|
7 |
714,201 |
100,000 |
40,710 |
854,911 |
|
8 |
854,911 |
100,000 |
47,746 |
1,002,656 |
|
9 |
1,002,656 |
100,000 |
55,133 |
1,157,789 |
|
10 |
1,157,789 |
100,000 |
62,889 |
1,320,679 |
|
11 |
1,320,679 |
100,000 |
71,034 |
1,491,713 |
|
12 |
1,491,713 |
100,000 |
79,586 |
1,671,298 |
|
13 |
1,671,298 |
100,000 |
88,565 |
1,859,863 |
|
14 |
1,859,863 |
100,000 |
97,993 |
2,057,856 |
|
15 |
2,057,856 |
100,000 |
107,893 |
2,265,749 |
|
16 |
2,265,749 |
100,000 |
118,287 |
2,484,037 |
|
17 |
2,484,037 |
100,000 |
129,202 |
2,713,238 |
|
18 |
2,713,238 |
100,000 |
140,662 |
2,953,900 |
|
19 |
2,953,900 |
100,000 |
152,695 |
3,206,595 |
|
20 |
3,206,595 |
100,000 |
165,330 |
3,471,925 |
|
Investment in Mutual Fund, assuming 15 per cent annual Return |
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|
Year |
Opening Value |
Annual Premium |
Return |
Closing / Redemption Value |
|
1 |
0 |
100,000 |
15,000 |
115,000 |
|
2 |
115,000 |
100,000 |
32,250 |
247,250 |
|
3 |
247,250 |
100,000 |
52,088 |
399,338 |
|
4 |
399,338 |
100,000 |
74,901 |
574,238 |
|
5 |
574,238 |
100,000 |
101,136 |
775,374 |
|
6 |
775,374 |
100,000 |
131,306 |
1,006,680 |
|
7 |
1,006,680 |
100,000 |
166,002 |
1,272,682 |
|
8 |
1,272,682 |
100,000 |
205,902 |
1,578,584 |
|
9 |
1,578,584 |
100,000 |
251,788 |
1,930,372 |
|
10 |
1,930,372 |
100,000 |
304,556 |
2,334,928 |
|
11 |
2,334,928 |
100,000 |
365,239 |
2,800,167 |
|
12 |
2,800,167 |
100,000 |
435,025 |
3,335,192 |
|
13 |
3,335,192 |
100,000 |
515,279 |
3,950,471 |
|
14 |
3,950,471 |
100,000 |
607,571 |
4,658,041 |
|
15 |
4,658,041 |
100,000 |
713,706 |
5,471,747 |
|
16 |
5,471,747 |
100,000 |
835,762 |
6,407,509 |
|
17 |
6,407,509 |
100,000 |
976,126 |
7,483,636 |
|
18 |
7,483,636 |
100,000 |
1,137,545 |
8,721,181 |
|
19 |
8,721,181 |
100,000 |
1,323,177 |
10,144,358 |
|
20 |
10,144,358 |
100,000 |
1,536,654 |
11,781,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Banks, assuming 10 per cent annual Return |
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|
Year |
Opening Value |
Annual Premium |
Return |
Closing / Redemption Value |
|
1 |
0 |
100,000 |
10,000 |
110,000 |
|
2 |
110,000 |
100,000 |
21,000 |
231,000 |
|
3 |
231,000 |
100,000 |
33,100 |
364,100 |
|
4 |
364,100 |
100,000 |
46,410 |
510,510 |
|
5 |
510,510 |
100,000 |
61,051 |
671,561 |
|
6 |
671,561 |
100,000 |
77,156 |
848,717 |
|
7 |
848,717 |
100,000 |
94,872 |
1,043,589 |
|
8 |
1,043,589 |
100,000 |
114,359 |
1,257,948 |
|
9 |
1,257,948 |
100,000 |
135,795 |
1,493,742 |
|
10 |
1,493,742 |
100,000 |
159,374 |
1,753,117 |
|
11 |
1,753,117 |
100,000 |
185,312 |
2,038,428 |
|
12 |
2,038,428 |
100,000 |
213,843 |
2,352,271 |
|
13 |
2,352,271 |
100,000 |
245,227 |
2,697,498 |
|
14 |
2,697,498 |
100,000 |
279,750 |
3,077,248 |
|
15 |
3,077,248 |
100,000 |
317,725 |
3,494,973 |
|
16 |
3,494,973 |
100,000 |
359,497 |
3,954,470 |
|
17 |
3,954,470 |
100,000 |
405,447 |
4,459,917 |
|
18 |
4,459,917 |
100,000 |
455,992 |
5,015,909 |
|
19 |
5,015,909 |
100,000 |
511,591 |
5,627,500 |
|
20 |
5,627,500 |
100,000 |
572,750 |
6,300,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Mix Plan- Accidental Insurance Cover for Rs 20 Lacs, Premium RS 5000 |
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and Balance 95000 equal in Mutual Fund and Bank FD |
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|
Year |
Opening Value |
Annual Premium |
Return |
Closing / Redemption Value |
|
1 |
0 |
95,000 |
11,875 |
106,875 |
|
2 |
106,875 |
95,000 |
25,234 |
227,109 |
|
3 |
227,109 |
95,000 |
40,264 |
362,373 |
|
4 |
362,373 |
95,000 |
57,172 |
514,545 |
|
5 |
514,545 |
95,000 |
76,193 |
685,738 |
|
6 |
685,738 |
95,000 |
97,592 |
878,330 |
|
7 |
878,330 |
95,000 |
121,666 |
1,094,996 |
|
8 |
1,094,996 |
95,000 |
148,750 |
1,338,746 |
|
9 |
1,338,746 |
95,000 |
179,218 |
1,612,964 |
|
10 |
1,612,964 |
95,000 |
213,495 |
1,921,459 |
|
11 |
1,921,459 |
95,000 |
252,057 |
2,268,517 |
|
12 |
2,268,517 |
95,000 |
295,440 |
2,658,957 |
|
13 |
2,658,957 |
95,000 |
344,245 |
3,098,201 |
|
14 |
3,098,201 |
95,000 |
399,150 |
3,592,351 |
|
15 |
3,592,351 |
95,000 |
460,919 |
4,148,270 |
|
16 |
4,148,270 |
95,000 |
530,409 |
4,773,679 |
|
17 |
4,773,679 |
95,000 |
608,585 |
5,477,264 |
|
18 |
5,477,264 |
95,000 |
696,533 |
6,268,797 |
|
19 |
6,268,797 |
95,000 |
795,475 |
7,159,271 |
|
20 |
7,159,271 |
95,000 |
906,784 |
8,161,055 |
|
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Your comments are welcome