Cover your risks for life

A few months back, I attended the wedding of a close friend. I still remember the marriage vows that were read8212;through the pressures of...

A few months back, I attended the wedding of a close friend. I still remember the marriage vows that were read8212;through the pressures of the present and the uncertainties of the future, I promise to be faithful to you.

I can8217;t help but reflect upon them every time I advise people on life insurance. The overriding emphasis of using life insurance policies as tax saving or investment tools has relegated their true rai son d8217;etre8212;risk coverage 8212;to a secondary factor. Few realise that most investment options are not substitutes to life insurance because it is only life insurance that gives both risk cover as well as returns on savings.

Life Insurance is a contract providing for payment of a sum of money to the person assured or, failing him, to the person entitled to receive the same, on the happening of a certain event. The event may be planned such as child education or unplanned such as death. Uncertainty definitely exists.

Ironic, isn8217;t it? We know that these uncertainties will be with us ALL our lives, but many of us still believe in buying life insurance only for a limited period rather than our whole life. There are still others who would buy it for tax savings and investment purposes alone. This leads me to ask a fundamental question8212;are you living up to your promise to protect your family? If you care for your family and their well being, life insurance is a must.

All life insurance products in the market can be categorised into three kinds 8211; Whole Life, Term and Endowment. Lets try and understand the basics of each of them.

WHOLE LIFE INSURANCE

Whole Life Insurance provides protection for your entire life. Besides providing protection, there is a cash component that accumulates which can be used to pay future premiums, fund retirement and college education and provide emergency cash reserves. Whole Life products are true life insurance products as they have their centre of gravity towards protection rather than investment.

TERM INSURANCE

Term Insurance covers you for a specified period of time. If the insured event happens within that specified period, your nominee shall be paid the death benefits. But if you live, you shall not receive any benefits whatsoever. It is simply a policy for you if your insurance needs are temporary. Often it is said that term insurance expires when you need it the most.

ENDOWMENT INSURANCE

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Endowment policies are essentially money accumulation plans that guarantee certain amount of cash at the end of a specified period or when the eventuality happens; whichever is earlier. Money back policies are endowment plans that periodically return parts of the face amount. In this policy, premiums are higher than other forms of life insurance.

So which one do you choose? World-over, millions buy Whole Life policies to build the foundation of protection for their family. It is only after this strong foundation that they go for investment options. The reason for this success of Whole Life policies is pertinent.

The traditional 20-year money-back policy a derivative of endowment policies sold commonly in India is an inflexible product. If you buy the policy at the age 28, you typically get returns at ages8212;32, 36, 40 and 44. But what if you required money at age 42? Can your life insurance policy provide it? No. Also, money you receive at interim periods invariably gets spent instead of being reinvested. In other words, money-back policies do not encourage long-term savings.

Endowment policies are of a limited tenor. If a person has bought a 30-year endowment policy at age 28, he would have paid between Rs 10,000 to Rs 14,000 per annum for an insurance cover of Rs 400,000. At the end of the 30-year term, the person would receive about Rs 12,00,000 to Rs 14,00,000. He still might have liabilities such as payments for his housing loan, his child8217;s marriage and funding his retirement. To give you an idea, it is believed that, a marriage that today costs Rs 200,000 will cost about Rs 950,000 by 2020. It is therefore unlikely that the person will be able to meet all his liabilities with this lumpsum amount. In addition, at 58, the customer may no longer be in sound health, so no insurance companies will provide insurance cover and therefore protection for the family or even if they do, it will be very expensive. An insurance cover, if available, for a period of 10 years and sum assured of Rs 400,000 would cost between Rs 40,000 to Rs 50,000 per annum.

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Now let us consider another situation wherein he would have bought a Whole Life Policy with an insurance cover of Rs 250,000. Assuming he has chosen the paid up addition bonus option and the flexibility to increase his cover at regular intervals via the option to participate in progressive bonuses. He would still be spending the same amount of money every year, but should he not be around, his family would receive about Rs 20,00,000 to Rs 22,00,000 which would be a far more comfortable position compared to when he had bought an endowment policy. The choice is clear. A Whole Life Policy is a classic example of the value and utility of life insurance. It is truly a powerful policy as it provides money when you are alive and also when you aren8217;t. It comes with infinite flexibility to suit your financial needs at every stage of life.

Post Script: Not for a moment am I suggesting that people not invest in endowment policies. It is however important to understand that endowment policies are essentially money accumulation plans for a specified tenure or when the eventuality happens; whichever is earlier.

The author is the senior vice-president of Max New York Life