Insurance, particularly life insurance, is a very deceptive and dangerous minefield.
Instead of 'protecting' the policyholders and their nominees, it has in fact destroyed the personal finances of numerous people.
The key idea of the quiz below is to reveal the true nature of these policies, so that you don't become their next victim.
Ques. 1: You plan to buy an insurance policy to protect your family against financial difficulties, in case anything unfortunate happens to you. Which policy would you buy?
1. Term Policy
2. Unit Linked Insurance Plan (ULIP)
3. Moneyback Policy / Endowment Policy
Correct answer - 1
Key Tip – Term policies i.e. the pure-protection policies will provide 'adequate life cover at the minimum premium'. Others will have a comparatively MUCH higher premium (as they combine both protection and investment). And, since the premium that we can afford to pay is usually limited, we will never get sufficient cover through such policies.
For example, even Rs.5,000 premium for a term policy may fetch you a life cover of Rs.1 crore. Whereas even Rs.50,000 as premium will not buy you a life cover of more than Rs.10-20 lakhs under moneyback, endowment or ULIP.
Will your family be financially comfortable with Rs.1 crore or Rs.10-20 lakhs? Can you afford to pay Rs.5,000 every year for the next 15-20 years or Rs.50,000? Think!
Ques. 2: You are a 27-year old MBA working in an IT company. You have recently married and your spouse is working in a Bank. Which insurance policy will you buy?
1. Moneyback Policy so as to get regular inflow at various stages; which will help you finance a house 5 years later, put your first child in school after 10 years, etc.
2. Unit Linked Insurance Policy which may help you to earn higher market-linked returns from the equity markets
3. None.
Correct answer - 3
Key Tip – Presently you don't have any dependents. Even your spouse is employed and hence financially not dependent on you. Therefore, you don't need the financial security which an insurance policy offers. So why spend money on something which you don't need at present? Instead the money should be invested in pure investment products — e.g. PPF, Fixed Deposits, Mutual Funds, etc. — and you save on insurance costs i.e. mortality charges at least till you have kids.
Ques. 3: You want to invest Rs.15,000 every year for the next 10-15 years. Which of the following investment options you will NOT include in your portfolio?
1. Equity Mutual Fund.
2. Insurance Policy
3. PPF
Correct answer - 2
Key Tip – Due to various factors such as high commission and other expenses, rigid investment guidelines for insurance companies, etc. the returns from insurance policies are usually FAR LESS than other comparable investment products. Also, they offer very little flexibility, liquidity and diversification. These are serious drawbacks of an insurance policy.
There are much better alternatives available for investment. Over long term one can easily earn higher returns from PPF or Equity MFs. So depending on one's risk appetite one could choose a suitable mix of these options and avoid buying insurance for investment purposes.
Ques. 4: You have recently got Rs.1 lakh as gift from your father. You want to invest it for long term. Should you buy an insurance policy?
1. Yes
2. No
3. Yes, a single-premium policy
Correct answer - 2
Key Tip – Gift is a one-time receipt. But insurance is a long-term contract. It is not prudent to make a long term commitment based on one-time inflow. You could have problems in paying premiums in the future. While buying a single premium policy is feasible, here are 7 Reasons Why Single Premium Insurance Is A Stupidity.
Ques. 5: I am a 35-year person running a successful business. Four years back I had purchased an endowment policy for a 20-year term. I am not happy with the returns. What should I do?
1. Surrender it. I will get back only about 30% of the total premiums paid till date except the first premium, plus some accrued bonus.
2. Convert the policy into a partly paid-up one. This will reduce the cover, but I don't have to pay any further premiums. I will get back the premiums paid + bonus accumulated till date, after 20 years as per the original term.
3. Continue with it.
Correct answer - 1
Key Tip – It is true that I will incur a loss of around 70-75%. But if I can earn about 12-14% p.a. returns on the 25-30% money that I get back plus on the amounts which I would have otherwise paid as premiums, I would still end-up with a higher corpus at the end of 20 years. Earning 12-14% p.a. returns over such a long period is quite a feasible and realistic assumption.
Concluding: In short, there are many harmful insurance policies aka 'financial bombs' in an insurer or his agent's armoury. Be a smart policy buyer and don't let them cause any damage to your personal finances.
Instead of 'protecting' the policyholders and their nominees, it has in fact destroyed the personal finances of numerous people.
The key idea of the quiz below is to reveal the true nature of these policies, so that you don't become their next victim.
Ques. 1: You plan to buy an insurance policy to protect your family against financial difficulties, in case anything unfortunate happens to you. Which policy would you buy?
1. Term Policy
2. Unit Linked Insurance Plan (ULIP)
3. Moneyback Policy / Endowment Policy
Correct answer - 1
Key Tip – Term policies i.e. the pure-protection policies will provide 'adequate life cover at the minimum premium'. Others will have a comparatively MUCH higher premium (as they combine both protection and investment). And, since the premium that we can afford to pay is usually limited, we will never get sufficient cover through such policies.
For example, even Rs.5,000 premium for a term policy may fetch you a life cover of Rs.1 crore. Whereas even Rs.50,000 as premium will not buy you a life cover of more than Rs.10-20 lakhs under moneyback, endowment or ULIP.
Will your family be financially comfortable with Rs.1 crore or Rs.10-20 lakhs? Can you afford to pay Rs.5,000 every year for the next 15-20 years or Rs.50,000? Think!
Ques. 2: You are a 27-year old MBA working in an IT company. You have recently married and your spouse is working in a Bank. Which insurance policy will you buy?
1. Moneyback Policy so as to get regular inflow at various stages; which will help you finance a house 5 years later, put your first child in school after 10 years, etc.
2. Unit Linked Insurance Policy which may help you to earn higher market-linked returns from the equity markets
3. None.
Correct answer - 3
Key Tip – Presently you don't have any dependents. Even your spouse is employed and hence financially not dependent on you. Therefore, you don't need the financial security which an insurance policy offers. So why spend money on something which you don't need at present? Instead the money should be invested in pure investment products — e.g. PPF, Fixed Deposits, Mutual Funds, etc. — and you save on insurance costs i.e. mortality charges at least till you have kids.
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| Many harmful insurance policies aka 'financial bombs' in an agent's armoury. |
Ques. 3: You want to invest Rs.15,000 every year for the next 10-15 years. Which of the following investment options you will NOT include in your portfolio?
1. Equity Mutual Fund.
2. Insurance Policy
3. PPF
Correct answer - 2
Key Tip – Due to various factors such as high commission and other expenses, rigid investment guidelines for insurance companies, etc. the returns from insurance policies are usually FAR LESS than other comparable investment products. Also, they offer very little flexibility, liquidity and diversification. These are serious drawbacks of an insurance policy.
There are much better alternatives available for investment. Over long term one can easily earn higher returns from PPF or Equity MFs. So depending on one's risk appetite one could choose a suitable mix of these options and avoid buying insurance for investment purposes.
Ques. 4: You have recently got Rs.1 lakh as gift from your father. You want to invest it for long term. Should you buy an insurance policy?
1. Yes
2. No
3. Yes, a single-premium policy
Correct answer - 2
Key Tip – Gift is a one-time receipt. But insurance is a long-term contract. It is not prudent to make a long term commitment based on one-time inflow. You could have problems in paying premiums in the future. While buying a single premium policy is feasible, here are 7 Reasons Why Single Premium Insurance Is A Stupidity.
Ques. 5: I am a 35-year person running a successful business. Four years back I had purchased an endowment policy for a 20-year term. I am not happy with the returns. What should I do?
1. Surrender it. I will get back only about 30% of the total premiums paid till date except the first premium, plus some accrued bonus.
2. Convert the policy into a partly paid-up one. This will reduce the cover, but I don't have to pay any further premiums. I will get back the premiums paid + bonus accumulated till date, after 20 years as per the original term.
3. Continue with it.
Correct answer - 1
Key Tip – It is true that I will incur a loss of around 70-75%. But if I can earn about 12-14% p.a. returns on the 25-30% money that I get back plus on the amounts which I would have otherwise paid as premiums, I would still end-up with a higher corpus at the end of 20 years. Earning 12-14% p.a. returns over such a long period is quite a feasible and realistic assumption.
Concluding: In short, there are many harmful insurance policies aka 'financial bombs' in an insurer or his agent's armoury. Be a smart policy buyer and don't let them cause any damage to your personal finances.