Most people in India buy life insurance because life insurance products are tax efficient. A tax relief is usually given on products or goods which the Government thinks is good for its people and therefore would like to encourage its people to buy more of. However, when an individual is buying life insurance, gaining tax incentive should not be the only reason or criterion for buying it. The motivation behind buying a life insurance policy should be based on what exact need it addresses. An individual should assess the purpose of buying life insurance by looking at their lifestyle, attitude towards risk, financial liabilities, income, family status (i.e. number of financial dependants) and financial goals.
Taking a step back from all of this, fundamental economics says that a market good is one that satisfies human wants and provides some form of utility. So, like any other good or service in the market, a life insurance product is there to satisfy a need. What is that need, if there exists one?
At the heart of it, a life insurance product insures an individual’s family’s lifestyle and their ability to meet liabilities if the individual’s income is lost because of the unfortunate event of his/her death.
So, by buying life insurance, you must fully know that this core need is what you are addressing. Knowing the underlying products makes this self-assessment easier. Products where this core need alone is addressed are called pure term products. In Indian market, life insurance companies usually market such products with names containing words1 like ‘term’, ‘smart term’, ‘protect’, ‘raksha’, ‘secure’ and so on.
In addition to giving the family some peace of mind in terms of providing death risk protection, there are a few perks that come with most of the life insurance products such as:
- Should you wish to use life insurance as a vehicle that drives you into a savings discipline, choose one which has an element that pays you benefits during its term and/or at the end of its term. The savings can be money put away for a rainy day or can be more targeted e.g. retirement or child’s university fees. The various names1 that life insurance companies normally use to market such products/benefits are ‘money back’, ‘return of premium’, ‘assured savings’ and so on. (These are just examples and not exact names).
Some products might give back more savings than what you have paid as premiums. These are usually called by names containing words1 like ‘plus’, ‘advantage’, ‘money multiplier’, ‘super/increasing money back’, ‘endowment’ and so on. You can see how some of these example words are self-explanatory in conveying the message that they give more than just returning your premiums and providing death risk protection.
- Should you wish to take a couple of steps further and use a life insurance product as an investment, choose one which has a significant investment related element e.g. Unit Linked insurance products (a completely different genre of life insurance products compared to traditional life insurance). Whether this is the right way to invest your money compared to other investment vehicles in the market is a topic for a different day.
- Should you wish to cover additional risks like critical or terminal illnesses, opt in for add-ons that come along with most products. These opt-ins are called “Riders”. Again, how these compare and contrast with similar looking health insurance products is a topic on its own. However, the riders are no doubt, a smart and cost-effective way to get additional peace of mind by addressing financial needs typically arising out of unfortunate serious illnesses.
In a nutshell, when you are at the crossroads of life insurance decision-making, evaluate what your family’s financial needs are and what your attitude towards financial stability is. Weigh this self-evaluation against the life insurance offering in the market. This will help form a high-level opinion on what level of life insurance (and additional savings/investment benefits) you need to look for. In our upcoming posts, we will talk about what practical things you need to keep in mind while purchasing life insurance.