Mumbai: A popular life insurance advertisement shows a husband asking his wife, “Mere bina jee paogi tum?” when she wants him to sign papers subscribing to a life insurance policy.
The wife, taken aback, replies: “Nahin.” “What will you do with all the money you will get from the life insurance in case I die?” he asks again. She then makes him understand that his signing the papers would guarantee their daughter’s education, his retirement and their overall future. “Sab guarantee matlab no tension aur tension ke bina aadmi zyaada jeeta hai na? Toh apni lambi umar ke liye... ...sign kar do,” she says. The husband signs the papers with an ironic remark: “Yaani ki lambi umar tak jhelna padega tumhe.”
The underlying theme in most life insurance advertisements is more or less similar.
As Tyler Cowen, an economist at George Mason university in the US, writes in the book, Discover your Inner Economist - Use Incentives to Fall in Love, Survive Your Next Meeting and Motivate Your Dentist, “Often, buying insurance is about investing in a story about who we are and what we care about; insurance salesmen have long recognised this fact and built their pitches around it.”
A recent insurance advertisement, which is very different from the typical life insurance advertisements, has the ‘thinking’ woman’s sex symbol, talking about people suffering from - K.I.L.B or kam insurance lene ki bimari. Never before has an insurance advertisement talked about the real problem so directly.
Most of us do not have the right level of life insurance cover. And who is to be blamed for this? To some extent our ignorance and to a large extent, life insurance companies and their agents, who are more interested in selling investment products masquerading as insurance as these fetch higher margins.
That explains why pure insurance covers (or term insurance as it is popularly known) forms a very minuscule percentage of the total amount of life insurance being sold in the country.
The first financial decision that any working professional who has a dependant family should take is get himself is a term insurance policy. In a term insurance policy, in case of death of the policyholder during the term of the policy, the nominee gets the ‘sum assured’ (or the life cover). But if the policyholder survives the period of the policy, he does not get anything.
One reason people don’t like term insurance is the fact that if they were to survive the term of the policy, they feel, the premium paid is wasted. However, what they don’t realise is that they are ‘insuring’ themselves by paying a premium and not investing. Term plans have the lowest premium among all the different insurance plans. And as we shall see, if the individual calculates the right amount of insurance cover and opts for it, the cheapest way to get it is by buying a term insurance cover.
So, how is the right amount of insurance cover calculated?
A thumb rule going is that the insurance cover of an individual should be at least 5-7 times his annual income. Going by this, if a 30-year-old earns Rs 6 lakh per annum, he should have an insurance cover of Rs 42 lakh. But this approach, though better than having no insurance cover at all, is not the only or the best way to approach the problem.
Another way to calculate the right amount of insurance cover is the human life approach. Under this, someone earning Rs 6 lakh per year is taken to be earning Rs 50,000 per month. Assume that his own expenditure per month is at Rs 10,000. The remaining Rs 40,000 goes towards meeting the family expenditure and savings. If something were to happen to him, his family, which is dependant on him, would need Rs 40,000 per month to maintain a similar standard of living. Now, to earn an income of Rs 40,000 per month at a rate of return of 8% per year, he would require an investment of Rs 60 lakh, which is the amount of insurance cover he should have. Thus, had he followed the thumb rule, he would have been underinsured.
The human life approach to calculating the amount of insurance cover is also not perfect. It does not take into account the rate of inflation. A term insurance cover of Rs 60 lakh for a period of 35 years for a 30-year-old would involve a premium of around Rs 23,000 per year. On the other hand, an endowment policy with a similar cover would require a premium payment of nearly Rs 1.6 lakh per annum, which is seven times that and clearly beyond the means of someone who earns Rs 6 lakh per year.
The other thing to keep in mind is to get a term cover for as long as possible. If in the example taken above the individual had taken a policy for 25 years, he would have needed another policy once this policy expired. At 55, he would have found it very difficult to get an insurance cover and even if he did, he would have to pay an exorbitant premium for it.
The wife, taken aback, replies: “Nahin.” “What will you do with all the money you will get from the life insurance in case I die?” he asks again. She then makes him understand that his signing the papers would guarantee their daughter’s education, his retirement and their overall future. “Sab guarantee matlab no tension aur tension ke bina aadmi zyaada jeeta hai na? Toh apni lambi umar ke liye... ...sign kar do,” she says. The husband signs the papers with an ironic remark: “Yaani ki lambi umar tak jhelna padega tumhe.”
The underlying theme in most life insurance advertisements is more or less similar.
As Tyler Cowen, an economist at George Mason university in the US, writes in the book, Discover your Inner Economist - Use Incentives to Fall in Love, Survive Your Next Meeting and Motivate Your Dentist, “Often, buying insurance is about investing in a story about who we are and what we care about; insurance salesmen have long recognised this fact and built their pitches around it.”
A recent insurance advertisement, which is very different from the typical life insurance advertisements, has the ‘thinking’ woman’s sex symbol, talking about people suffering from - K.I.L.B or kam insurance lene ki bimari. Never before has an insurance advertisement talked about the real problem so directly.
Most of us do not have the right level of life insurance cover. And who is to be blamed for this? To some extent our ignorance and to a large extent, life insurance companies and their agents, who are more interested in selling investment products masquerading as insurance as these fetch higher margins.
That explains why pure insurance covers (or term insurance as it is popularly known) forms a very minuscule percentage of the total amount of life insurance being sold in the country.
The first financial decision that any working professional who has a dependant family should take is get himself is a term insurance policy. In a term insurance policy, in case of death of the policyholder during the term of the policy, the nominee gets the ‘sum assured’ (or the life cover). But if the policyholder survives the period of the policy, he does not get anything.
One reason people don’t like term insurance is the fact that if they were to survive the term of the policy, they feel, the premium paid is wasted. However, what they don’t realise is that they are ‘insuring’ themselves by paying a premium and not investing. Term plans have the lowest premium among all the different insurance plans. And as we shall see, if the individual calculates the right amount of insurance cover and opts for it, the cheapest way to get it is by buying a term insurance cover.
So, how is the right amount of insurance cover calculated?
A thumb rule going is that the insurance cover of an individual should be at least 5-7 times his annual income. Going by this, if a 30-year-old earns Rs 6 lakh per annum, he should have an insurance cover of Rs 42 lakh. But this approach, though better than having no insurance cover at all, is not the only or the best way to approach the problem.
Another way to calculate the right amount of insurance cover is the human life approach. Under this, someone earning Rs 6 lakh per year is taken to be earning Rs 50,000 per month. Assume that his own expenditure per month is at Rs 10,000. The remaining Rs 40,000 goes towards meeting the family expenditure and savings. If something were to happen to him, his family, which is dependant on him, would need Rs 40,000 per month to maintain a similar standard of living. Now, to earn an income of Rs 40,000 per month at a rate of return of 8% per year, he would require an investment of Rs 60 lakh, which is the amount of insurance cover he should have. Thus, had he followed the thumb rule, he would have been underinsured.
The human life approach to calculating the amount of insurance cover is also not perfect. It does not take into account the rate of inflation. A term insurance cover of Rs 60 lakh for a period of 35 years for a 30-year-old would involve a premium of around Rs 23,000 per year. On the other hand, an endowment policy with a similar cover would require a premium payment of nearly Rs 1.6 lakh per annum, which is seven times that and clearly beyond the means of someone who earns Rs 6 lakh per year.
The other thing to keep in mind is to get a term cover for as long as possible. If in the example taken above the individual had taken a policy for 25 years, he would have needed another policy once this policy expired. At 55, he would have found it very difficult to get an insurance cover and even if he did, he would have to pay an exorbitant premium for it.
Source: DNA
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