Let me tell you the insider story.
I have an insurance license and I know how the industry works.
Every insurance company has more than 30 products with so many options that customer gets confused which is a better product.
Mainly the insurance products are divided into 2 categories
- Push Products
- Pure Insurance Products
Insurance products linked with an investment are called push products because the target customer is not really interested in the insurance.
The agent is supposed to sell the investment product by convincing the customer.
The sales pitch sounds lucrative
- Sir, you keep investing just 10,000 per month for 10 years
- Then the company will keep paying you back 10,000 for the next 15 years
- If anything happens to you in those 25 years, then the company will pay Rs. 10 Lakh to your family.
The agent just pushed a low return product that would fail to fulfill the purpose of both the insurance & investment.
No great help to your family with 10 Lakh insurance in case you were the only bread earner.
Less than 5% returns on your invested money over 10 years.
If you would have invested 10,000 per month for 10 years in PPF then you would have 18,40,000 at 8% interest.
If you stop investing further then also you will earn Rs. 1,47,000 every year on your investment of 18.4L at 8% interest.
If you keep taking out 10,000 per month from newly earned interest then also you would be left with 27,000 at the end of the year + your base capital of 18.4L
Don’t fall for investment-linked insurance plans.
Get only Term insurance.
A healthy 30 years old person with a salary of more than 5L per year can get 1 Crore insurance in Rs. 15,000 per year only.
A real example of an endowment plan of Rs 2 crore for 20 years – pay a premium amount of Rs. 1,50,000.
Pure insurance –
Rs 1300 per month for Rs. 2 Crore sum assured for insurance coverage till the age 60.
How Much Should be the Life Insurance
You can calculate the amount of insurance based on your current income, assuming your all household and other expenses have been taken care of through that income.
The amount should be 20X of your annual income because if you have children then a period of 20 years will be required for them to become self earners.
Suppose your current annual income is Rs. 10 Lakh, then 20x of the annual income is Rs. 2 Crore.
This may change from person to person and individual life situation.
So, suppose a person is 30-35 years of age and he dies and he has a 5-year-old kid then he may need 15-20 year more till his child starts earning income.
Or you have a kid of 10 years of age then you may need protection for the next 10 years.
You must have clarity for how many years your family needs protection.
There may be a situation when the annual income grows to Rs. 15 Lakh from Rs. 10 Lakh in 10 years. You will have sufficient investments in 10 years that will also give financial protection to your family.
In case of sudden death after 10 years, your family will get 2 Crores from the insurance company + Your investment assets of 10 years.
As time passes, you would have less dependency on the insurance company.
Investment and insurance are inversely proportional to each other. You need more insurance because you have fewer investments.
By 2030 your investments grow to Rs. 60 Lakh then you may require only Rs. 1.5 Crore of insurance.
By 2040 this may even reduce a situation where your insurance requirements are less than Rs. 50 Lakh because your investments have grown to over Rs. 1 Crore.
Tips to Choose Right Life Insurance
Pick a term insurance provider that has a higher claim settlement ratio of over 90%
Few term insurance policies come with additional riders in case of an accident by paying a small additional premium.
Take cover amount considering the number of family members and their lifestyle.
Your assignment – Calculate your term insurance requirement based on your current income and investments.