Let’s be clear, life insurance is important. What is more important though is the type of life insurance you should look for. There are innumerable cases where people are saddled with life insurance products that have high premiums and low returns. Unfortunately, this equation comes to fore only closer to the maturity of the insurance scheme, when it is too late to correct the misstep.
If you’re also paying a few thousands for your life insurance premium, with the hope of getting a suitable return for this long-term commitment, you need to do a quick check and reassess.
Are you paying too much?
First, try to establish if you are paying too much for a life insurance policy. The premium for each individual is different, but in case of many traditional insurance plans, the platform for premiums is already elevated. What this means is that regardless of your age and health, you are likely to be overpaying in traditional insurance schemes. You can get the benefit of a similar death benefit at a much cheaper cost just by switching to a term life insurance plan.
Two of the most popular types of life insurance are endowment policies and money-back policies – these are also referred to as traditional plans. Why are they popular? It’s because behaviourally we are averse to losses. We don’t like to pay for something without the hope for some return. Cashing in on this behaviour, insurance traditionally got sold as an investment with a side serving of insurance. However, in buying this ‘investment’ you are paying for the costs of insurance, which are high and at the same time getting a low return.
Let’s take an example. For a 35-year-old woman, an endowment plan seeks to return ₹10 lakh at maturity (15 years) but for this, you have to pay ₹6 lakh or ₹60,000 each year for 10 years. The plan claims a payout at 8% annually but the actual annual yield or return is 5.4%. A 15-year investment certainly deserves more than 5.4% return, which is unlikely to even cover for annual inflation in the economy. In real terms, after accounting for inflation impact, you earn nothing. Plus, the death benefit is extremely low. The returns are slightly lower when you convert this into a money-back policy.
If this is the type of insurance you have or are planning to get – i.e. endowment or money back policy – you will get your money back but it’s a low return for an even dismal insurance cover. This serves neither your long-term investment goal nor your goal to protect your dependents in case of your untimely demise.
What can you change?
Remember the policy type discussed above is an ‘investment’ cum insurance plan. A pure insurance policy is known as a term life insurance and this is unbelievably reasonable to buy. For a 35-year-old self-employed woman earning up to ₹15 lakhs a year, the life cover or sum assured can be as high as ₹1 crore on death with a small annual premium of ₹13,500. You will have to pay for 35 years. Assuming you outlive the term of your policy (35 years), you have spent a total of ₹4.7 lakh. Firstly, this is lower than the exorbitant ₹6 lakh you pay in 10 years or a return of close to nothing. Secondly, the money saved, ₹47,000, in case of this example – can then be invested in a more suitable long-term asset. If you break this amount up into monthly investments made in equity mutual funds you can potentially have a corpus slightly upwards of ₹70 lakh in 35 years.
To get the benefit of a higher sum assured and much better return on your long-term investment, you have to reconsider your expensive premium insurance. If all this analysis is difficult to grasp because of the numbers and you are not sure, then what you need to do is this:
Check the type of life insurance policy you have or are going to get and if this is anything other than a term life insurance, chances are you will be overpaying of a low sum assured. Hence, switch your choice.
If you have finished your premium paying term, and the policy is still in effect, then just keep it as there is no point in surrendering now.
If you are somewhere in between the premium paying term and realise it was the wrong type of policy, then check the details of the surrender value you can get. Usually, in very early years, you may get nothing from surrendering the policy so you will have to consider a write off for the premium already paid. If you are closer to the end of the premium paying term, then it might make sense to complete it rather than let go of what you have already paid.
If this is all still sounding a bit out of your grasp, then try to reach out to a financial advisor for help.