Published: May 4, 2022, 9:59am
Everybody knows that it is vital to provide for the certainties of life, such as their children’s future education or marriage, their retirement, or loss of future income due to death, disease, or disablement of the breadwinner. The utilization of life insurance products as a comprehensive tool for these certainties of life is less understood.
One of the reasons for this is the myths surrounding life insurance. There are many misconceptions and false information concerning life insurance. This article explores some of the most common life insurance myths, to help clear your doubts and gain knowledge that will enable you to make a sound decision. Because, unlike all the myths, Insurance is not an emotional decision. It is a sound risk management decision, which protects an individual against risks of:
Additionally, it offers convenience and the capability to structure products for a lifetime. When you adopt a “fill it. Shut it. Forget it.” Attitude, insurance is the best product to manage for the long-term certainties. It is the ONLY product that offers long-term guaranteed returns with no call option. The challenge of managing market and interest rate volatility for the future is a skill set possessed only by life insurers!
So, what are some of the common myths?
Fact: Life insurance is a risk management tool. Risk must not only be associated with dying but also with living too long. Advancements in medicine and science are prolonging life expectancy. If you were to live till age 90 and stopped working at 60, how would you manage your expenses? Risk also concerns investments, which can be impacted by market volatility, bad financial planning, or lack of financial discipline.
Insurance can help you secure your financial future. There are various options that can help you build a corpus to make you financially independent during retirement, cover exorbitant medical expenses, or build your wealth. You will always benefit from a timely investment in the right insurance product basis your need – suitability assessment.
Fact: Your employer covers you only till you are employed with the company. The policy gets terminated once you leave or retire. If the organization has financial upheavals, they may even cancel the policy or reduce the benefits. In which case, you will be stranded when you need insurance cover the most.
Employee insurance may be sufficient when you are young, healthy, and without responsibilities.
However, it won’t be enough to cover your future family’s needs like children’s education, marriage, medical emergencies of aging parents, the rising cost of living, and so on. Secondly, the cover may only include a death benefit. This means you are on your own when you retire in case you do not have a financial plan in place to take care of your expenses post retirement.
It is advisable to supplement your employer-provided cover with another insurance policy that is customized to your future needs. Take a policy that can support you financially all through your living years as well as keep your loved ones financially secure in case something was to happen to you.
Fact: Life insurance is one product that cannot be bought when needed. It needs to be bought for a time when you need it. It is a very simple adage “you cannot insure a building under fire”. It must be bought much before you need it and there are many reasons for this. Additionally, the best time to purchase a life insurance policy is when you are young since the premiums are lower and you can avail of high life cover at very low premiums.
If you have a student loan or a personal loan, this loan can be protected from becoming a burden to your parents due to any risk of death, disease, or disability as you grow older, your policy can also protect your family commitments, or cover your health-related and retirement expenses.
Fact: Life Insurance premium is the most versatile premium that can be found. It depends on multiple factors and can be adjusted to suit your premium paying capacity and gradually increased. The younger you are, the lower is the premium rate in any policy – be it pure risk or risk cum savings product.
Term insurance typically provides a large sum assured for a very low premium. You can always start with a small investment and extend your coverage as your income and responsibilities grow across different life stages.
Fact: Term Insurance is one of the products that cover the risk of dying too early. Life insurance companies offer multiple products, like traditional savings products, unit-linked, and pension products to address the various risk management needs of varied customer segments.
So, evaluate your current and future financial requirements when evaluating the policy purchase.
Fact: We need to examine this in the context of the need for which the policies are being evaluated. Higher age can mean very attractive annuities and is a positive for these products.
In the case of a pure risk policy (term), the pricing of the products is done with average assumptions of health conditions. So, when there are ages and medical conditions that are outside of the median/average, they will need to be priced to accommodate the higher risk. In case of certain outliers to the range, they may not be priceable risks.
It is also important to note that term policies are bought to protect loss of future earning potential.
Fact: Product comparisons have to be made in a like to like manner. Would you compare a smartphone by breaking up its components into a phone, camera, hard disk, browser, etc.? Similarly, Life Insurance products offer multiple features and much like a smartphone could be a combination of many features: mortality risks, morbidity risks, longevity risks, guaranteed returns, market-linked returns, whole life cover, amongst others. So, the comparison of standalone features may not give the customer clarity and a holistic perspective.
The distinctive features, however, are that the proceeds of most of the life insurance policies are tax-free. Life Insurance policies typically are long-term financial instruments, which offer competitive risk-adjusted returns vis-à-vis other asset classes, in the long run.
Fact: ULIP offers the dual benefit of protection and wealth creation in the long run. The new-age ULIPs come with considerably low charges and some of them even refund mortality/ other charges deducted during the term of the policy, on maturity.
ULIP offers flexibility and customization, which you can add to your policy as your needs change. You can easily switch between debt and equity funds within the same policy, as per your evolving needs. This allows you to invest across different asset classes under a single policy without any tax implications.
ULIP also allows tax-free partial cash withdrawal for exigencies post the lock-in period, thereby enabling liquidity during the policy term itself. ULIP policies have the unique advantage of being structured as a whole life policy, an accumulation and drawdown product, amongst other customer needs fulfillment.
Fact: Anyone with a regular source of income and who is not a minor can buy a policy, either in their own name or in the names of their spouse or children. Some insurers offer a joint insurance policy to cover both spouses under a single policy.
Parents can invest in a child plan to protect their children’s future needs. In case the child is a minor, once he/she attains the age of 18 years, the policy vests in the name of the child.
Fact: An insurance company will pay claims on policies in existence. That is the fundamental purpose of the company. In this context, it is important to remember that the Insurance policy is a contract of utmost good faith. So, the policy is only as valid as the information provided by the customer. Additionally, the premiums need to be paid regularly to keep the policy valid.
The policy payout includes all types of death – illness, accident, old age, war, riots, natural disasters (like floods, earthquakes), except death by suicide during the 1st policy year. Insurers are constantly adopting digitization in all their processes including the claims process to make it hassle-free.
Every family and individual has their own distinct financial needs. What might suit one may not be the best option for another. It is advisable to consult an insurance advisor to find a plan that suits you best. You can also go online and compare different policies offered by different insurance providers before you make a decision. Insurance is an important investment and money well spent only if you find the right plan. You will understand the value it offers in the long run. Don’t let these common myths make you think otherwise.
RM Vishakha, MD and CEO, IndiaFirst Life Insurance Company Limited, is a Chartered Accountant from the Institute of Chartered Accountants of India. She has helmed IndiaFirst Life since March 2015.
Aashika is the India Editor for Forbes Advisor. Her 15-year business and finance journalism stint has led her to report, write, edit and lead teams covering public investing, private investing and personal investing both in India and overseas. She has previously worked at CNBC-TV18, Thomson Reuters, The Economic Times and Entrepreneur.
Published: May 4, 2022, 9:59am