This is a 2nd post in the 5 post Introductory Series.
. In the previous post our emphasis was on DIY Financial Planning (FP), in which, towards the end, a term ‘FP components’ was used. Now, If you can think of FP as a ball, imagine cutting it into four equal pieces. These four pieces, in my thinking, would be the components we need. If even one of the pieces is missing, the ball would not just look not good, it would not properly roll either. Okey, imagine many balls with different sizes, all cut into pieces and mixed together. You will need to find right sized pieces to form a ball that would roll properly. Just like that, to make the ball of FP roll properly, you will need to find that four components which would fit well and which I will be writing about in this as well as upcoming three posts.
So, as is evident, one of the components is Term Insurance (TI). The most important one if you ask me. It is not something I might have to define in great detail, though. Still, i would put it as a contract for the worth of your life, defined by you in terms of a figure, for which you pay a certain amount every year to an Insurance Provider (IP) untill either you or the term of the contract expires. It’s an expense for safeguarding the future of your spouse/family in the event of your demise. I said it’s an expanse because there is no return on it. I know, many people who have purchased Endowment Insurance (EI) plans and who don’t know TI would be sceptical of this, but we will talk about that in a bit.
Do I really need TI?
There are three answers to this.
1. If you are super rich, like Warren Buffett or Mukesh Ambani and have multiple businesses spreading through multiple countries, probably you won’t need it. Income, profits and gains from their investments and businesses are so huge that a few crores worth of TI won’t matter.
2. If you’re alone in this world, and have nobody to cry if you die, you definitely don’t need it.
3. If you are anyone that does not belong to 1 or 2 above, you need it. And you need it ASAP if you haven’t already.
How much should I have?
That depends, mainly on your income. Experts say that you should have TI equalling 10-15 times your annual income. That said, if you earn 5 lac per year, you should have TI of 50-75 lac. IP may ask for your income proof as well as medical check up in case of higher Sum Assured. As for the premium, it will depend on your age and the Sum Assured. Say, for example, a premium for Rs. 50 lac for a 30 year male for a 30-35 year term would roughly be around Rs. 10000. Again EI plan owners would ask, we pay Rs. 10000 for a 1 lac policy, how can this be possible?
Okey, now let’s get into that. In India, we have these Insurance Agent (IA) creatures which, in the name of helping you, would do anything to help increase their own commission. What they sell is endowment or ULIP policies which earns them more commission than pure term insurance policy. as simple as that. Who are they? Believe me, in most cases that they will be your near relative or a friend. He comes to your home, asks few details, takes your signature on several papers and that’s it. Most of us have these kind of plans. Most of them sold by relatives and friends, to whom you couldn’t deny at that time. How many of you have genuinely gone to an IP firm to ask for such insurance? It’s not purchased by you, but it’s been sold to you. There is different if you can catch.
Let’s get ahead.
Wht’s with EI? Why TI instead?
The problem with EI is the problem with our mindset. Have you asked your agent how much money you will get in return after the end of term? If yes then it’s a wrong mindset. As I said earlier, Insurance should be an expense. You earn return on your investment, not on an expense. Now, Traditional Endowment Insurance plans that most of us have aren’t just insurance. They are insurance plus investment. Suppose a person pays Rs. 10000 premium per year for his policy with Sum Assured (SA) of Rs. 1 lac. Actual premium for that 1 lac would be around Rs. 500 to Rs. 1500(called premium towards mortality). Rest of the amount is just low cost investment for them. You are investing with them for a long term which they would repay you with so called 5-6 percent guaranteed returns and some shitty bonuses. Returns on other investment avenues are far better. And the problem here, is that while focusing on investment and return part, you forget the main part, that is insurance. Think about this. If you get to live throughout the term, say, for 25 years, the amount you will get in return say 3 lacs (for 1 lac SA), will not matter much for you and your family as your earnings will be much more at that time and also considering inflation would have risen the prices of almost everything manifold. Now, suppose if you die in between, your nominee will get that 1 lac. If you have a spouse who is not working, have school going kids, need to pay for day to day expenses, how many months or days do you think they gonna survive with that 1 lac?? Double question mark is for you to read the line twice if you haven’t got the severity of it already. Rs. 1 lac is not enough insurance as of today. Not even 2 lac , or 5 lac. Agents sell these plans to maximize their commission. They don’t cover you enough. What you need is enough SA to meet your family’s needs after your are gone. And TI provides just that. It provides cover big enough to meet expenses of your family, in case of your demise. But for a big cover, they eliminate return portion. You don’t get anything in return in case you get to live throughout the term (There are plans where you get refund of your paid premiums though, but I’ll cover that in a different post dedicated for that). That’s why I say that it is an expense. And we need to change our mindset about that to accept the reality of this most important requirement.
Alright, this is first and most important component of FP, as I said earlier, because life is uncertain and you don’t know what’s gonna happen next moment. And I think that necessitates you get a pure TI plan as soon as possible if you haven’t already. And by doing this part you can consider having completed 25 percent of your financial planning.
Being an introductory post I shouldn’t have stretched it this far, but I believe it will worth it if this benefits someone.
So, that’s it
Will be back soon…