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Life Insurance : A Terrific Concept but Terrible Product

As an idea, life insurance is indeed brilliant. It aims to minimize the financial hardship to the family, that may arise due to tragic loss of the bread winner's life.

However, most life insurance policies available in the market (except one), are indeed atrocious.

There is a huge disconnect between the conception and reality:

In a typical insurance plan, lakhs of people contribute a small amount every year, commonly referred to as the 'mortality insurance premium'. Upon death of the insured, this pool of money provides assured financial assistance to the few unfortunate families.

Isn't this sharing of burden among many, to soothe and soften the tragic blow, of immense utility?

In short, insurance is a perfect idea, that...
...has a noble purpose
...which is of huge benefit
...to a vast number of people
...at very nominal costs.

Then, why is the real situation on the ground, so unfruitful and unproductive?

Typically, there are two kinds of life insurance policies.

1. Policies that provide pure protection cover, as explained above. These are known as Term Insurance Plans. These are the policies that provide life insurance cover, in the truest sense of the word. They are the perfect product for the perfect idea.

Unfortunately, they are an exception:

Why? We'll see later.

2. Policies that also provide the facility of "investment", apart from its basic purpose i.e. "protection". In this investment-insurance combo, you will find many types of policies such as endowment, moneyback, wholelife and ULIP.

This is where the things turn bad:

good-bad-about-life-insurance
Are you aware of the Good and Bad points about Life Insurance Policies?

Four reasons why I say so:

1st : Wrong Design
More often than not, these policies are complicated in nature. They often use lots of jargon, coupled with many misleading terms.

In fact, my personal experience has been that, sometimes even the insurance agents struggle to understand the product. Therefore, to expect a financially lay customer to make sense of it, is simply out of question. In most instances, he will sign on the dotted line, purely on the trust and faith in the agent.

2nd : Wrong Costing
In general, in all these policies the costs are heavily loaded in favour of the insurance companies and the insurance agents. 

The returns, that the policy buyers can expect, are absolutely pathetic. You will be much better off by buying a term plan for your "protection" needs and putting the balance premium amount in the non-insurance-based investments.

3rd : Wrong Pitch
You will rarely see an insurance advertisement, offering "insurance" as the benefit.

However, you will come across plenty of insurance advertisements, that proclaim to offer you (a) Investment and (b) Tax Benefit.

Both these purposes, are served much (much) better, through various other products. As such, buying insurance policies for investment or tax deduction would be a bad (bad) step.

4th : Wrong Selling
Media is full of reports of mis-selling in insurance e.g. selling insurance to aged people, selling ULIPs to risk-averse investors, selling ULIP as a short-term plan, asking people to surrender old policies before maturity and switching to new policies, and more.

Such "unethical" and "illegal" practices are common and rampant. Hence, you must exercise extreme caution and extensive due diligence in buying insurance.

Given these many unfavourable facts, why are term plans an exception and investment-cum-insurance plans so popular:

Two reasons! One 'psychological' and other 'commercial'...

Psychological Reason
You are the culprit here.

In term plans, there are no returns. If you die, your nominees receive the Sum Insured. If you survive till policy maturity, you get nothing. This is not palatable to many. They are not willing to pay (premium), for nothing (except the intangible security).

In case you don't know, a certain amount is anyway deducted as mortality insurance from the premium that you pay for endowment, moneyback, etc. policies. Only the net amount is available for investment. So, it isn't as if you are getting free insurance in such policies.

As such, despite term plans being the simplest, cheapest and best option for life insurance, very few show the wisdom to buy one.

Commercial Reason
Your agent is responsible here.

For a particular sum insured and policy term, premium for endowment, moneyback type of policies would typically be around 10-20 times more than a comparable term policy. Agents are paid commission, which is a specified percentage of the premium that you pay.

Clearly, agents will earn far more commission selling the high-premium plans. So it is in their commercial interest to focus on such plans; rather than wasting their time and effort on the very-low-premium term plans.

I sincerely wish that Insurance Regulatory Authority of India (IRDAI) and the Govt. will wake up — soon — and do something about it.

I sincerely wish that the insurance companies will look for long-term benefits, for all the stakeholders, rather than just the short-term profitability for themselves and their agents.

I sincerely wish that the policy buyers will become well-informed and be VERY VERY CAREFUL when buying life insurance plans.

Last but not the least, hope you are aware of the misconceptions about insurance that are extremely worrying.

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