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An insurance policy is primarily meant to protect the income of the family's breadwinners. The idea is if any one or both die, their dependents continue to live comfortably.
Why is Life Insurance Important?
Myths About Life Insurance in India
Life Insurance is quite an important aspect of one's financial planning. It is critical to know all you can about Life Insurance before purchasing the policy.
Direct Benefits of taking a Life Insurance plan:
- Provides for Loss of Income
- Protects your Assets
- Financial Planning
- Tax Savings
Life Insurance takes care of those who are financially dependent on you even when you are not around to look after them. The expenses you may incur in future will keep increasing due to inflation, and thus even a fluctuation in your income may lead to a compromised lifestyle. Savings plan enables individuals to secure their financial future by helping you to get attractive returns.
Life Insurance is absolutely critical for everyone irrespective of the amount of income you currently earn, unless you have saved enough to ensure that your family can comfortably live with the savings alone - not everyone can manage to do this even with high salary and income levels.
Human Life Value Concept
Beyond all doubt, your life is invaluable. Yet, there is a certain worth that can be attributed to the financial support you offer your parents, spouse or children. This worth is referred to as Human Life Value (HLV). Human life value is the total amount you would need invested today, to equal the total earnings of a person's lifetime. In the future, if your family does not have the protective blanket of your presence, they will no longer be able to enjoy the benefits of the income you earned. Put simply, Human Life Value is the present value of your future earnings.
You should calculate your Human Life Value so you can accordingly invest in insurance plans that provide your family with adequate finances and hence security even in your absence.
Your Human Life Value is determined by 3 factors:
- Your age
- Current and future expenses
- Current and future income
As a rule of thumb, if you are 30 years of age, you should insure yourself for an amount approximately 8 times your annual income. Of course, the exact amount of your investment should be determined by the number of people who depend on you, all of your existing investments and your life stage. The Human Life Value calculator is designed in such a way to help you understand today's value of your future earning.
Living Too Long and Dying Too Early
One particular aspect of Life Insurance is to protect the individual against the risk of dying too early or living too long.
Risk of Dying Too Early
Every individual has a certain financial value attached to his life in the form of his earning potential. If he dies at a young age or during the time when he had an earning potential, his family suffers a financial loss in the form of his potential earnings. A lot of his obligations towards the family remain unfulfilled due to his sudden demise. This is called the Risk of Dying too early and it can be protected against by taking Life Insurance coverage.
Risk of Living Too long
Every individual plans his life and his sources of income to the best of his ability taking into account his life expectancy. Sometimes, despite the best of planning the individual is not able to provide for contingencies such as illnesses or injuries for himself or his spouse which results in denting his savings. If a person survives beyond his expected age, his planned sources of income could diminish or become inadequate due to a variety of reasons. This could result in not having money at the time when he needs it most. This is called the Risk of Living too long and it can be protected by taking Life Insurance policies where withdrawals are possible as and when required.
Before we get into the recommended approach to Life Insurance, let us delve on some of the myths surrounding Life Insurance in India. These myths will help to explain why the number of individuals insured and the average amount of insurance cover per individual is so low in our country.
I do not need Life Insurance
Most people never do believe that they can succumb to destiny and that they will live a long and healthy life. Sadly, that is not always true. A prudent financial plan needs to build in the risk of dying too early to ensure that our family's financial future is protected. There are financial tools that help us determine the "risk of dying early" leading to the quantum of Life Insurance required.
While the algorithms may be different, conceptually, all that these tools try and determine is the present value of your future earnings, keeping in mind your future goals and aspirations. It is important that each one of us put some thought into the potential exposure of our family, to the risk of the primary wage earner's risk of dying too early and arrive at the level of protection required.
I should buy Life Insurance so that I can save tax before the end of the financial year
Sad, but true; this is the way Life Insurance has been largely sold in the country. Individuals buy "enough" Life Insurance to get tax breaks just before the financial year ends. The moot question is - are we buying Life Insurance to save taxes or are we buying it to protect our family's financial future? Since people believe that nothing ever can happen to them, the decision on quantum of insurance cover and timing (on when to buy the policy) is made just before the financial year ends.
The question that we should ask ourselves is - do we believe that destiny will announce its arrival in our lives? Will destiny always allow you to complete your tax planning for the year and then strike? The answer is a resounding 'No'. However, lack of education has made customers believe that insurance is a tax planning tool and the protection element is at best - icing on the cake!
Insurance policies and guaranteed returns go hand in hand
The question we need to ask is - how much is the guaranteed return that a Life Insurance contract can give? The answer is, "I do not know". Unfortunately, individuals expect Life Insurance companies to give "high guaranteed" returns. What most individuals fail to understand is that Life Insurance contracts are long-term contracts. The way in which the contract works is that the premium that each of us pays gets invested after deducting for the cost of mortality and other administrative expenses of the insurance company.
Since the premium is paid over a period of time (typically), the investment return that the insurance company can generate on our savings depends upon the prevailing investment opportunities at the time when the premium is paid. With volatility in interest rates and capital markets, the level of investment return that an insurance company can generate can vary substantially. In such a scenario, where is the scope for the insurance company to offer a fixed return to their policy holders, but have an earning stream that is highly volatile and variable? Interest rates on Government of India Securities have fallen by over three hundred basis points in the last three years.
Given such an economic environment, it is foolhardy to expect that the "high guaranteed return" policies can continue for very long. The classic example is Japan where with interest rates at sub zero levels, insurance companies that offered guaranteed return policies to their policyholders are going under! Again, if you are buying Life Insurance for the "high guaranteed return" the policy offers, please think again. Your insurance company may not be able to pay you the promised return when your family needs the money the most!
I should always buy money back policies - this way at least I will get something back in return
Lack of customer education leads customers to buy what their agent(s) sell. Think about this - when we buy insurance for our homes, we buy to protect our home against fire and theft. When we buy insurance for our car, we buy insurance to protect ourselves against third party liabilities and damages. In the event that we do not claim from the insurance company, the premium paid is an expense. We buy peace of mind and protect our assets. Has anyone thought about what the most important asset for our family is? Could the most important asset be the primary wage earner for the family? Has anyone thought about buying protection for this important asset.
Agents sell policies that maximise the premium generated, since agents are paid commissions on the premium generated. Since the intent is to maximise the premium generated, the agent tends to sell money back/endowment policies where the premiums are higher than selling pure risk policies, where the premiums are lower. If you can buy the same level of insurance cover but pay one tenth of what you pay today to buy "money back" policies, you may wonder how! Pure risk term insurance policies have never been sold in this country. However, such policies provide the best possible protection to your family against the risk of dying too early for the lowest amount of premium. Ask your agent for a term insurance policy quote, the next time he comes selling a more expensive money back plan.
Axis Bank Limited ("Axis Bank") is registered with Insurance Regulatory & Development Authority of India ("IRDAI") as a Corporate Agent (Composite), IRDAI Registration No. CA0069 (valid till 31st March 2025) for distribution of Insurance Products. Axis Bank currently has a corporate agency agreement with (A) Max Life Insurance Co. Ltd, Life Insurance Corporation of India (LIC), Tata AIA Life Insurance Co. Ltd. and Bajaj Allianz Life Insurance Co. Ltd. for distribution of life insurance products; (B) Tata AIG General Insurance Co. Ltd, New India Assurance Co. Ltd, Bajaj Allianz General Insurance Co. Ltd, Royal Sundaram General Insurance Co. Ltd and ICICI Lombard General Insurance Co. Ltd for distribution of general insurance products. For distribution of health insurance products, Axis Bank has a corporate agency agreement with Aditya Birla Health Insurance Co. Ltd, HDFC ERGO General Insurance Co. Ltd and Niva Bupa Health Insurance Co. Ltd.
You can avail insurance from any of these insurers through Axis Bank as per your requirement and discretion. Please note that insurance is underwritten by the respective Insurance Companies and Axis Bank does not underwrite the risk or act as an insurer. The contract of insurance is between the Insurance Company and the insured only, and not between Axis Bank and the insured. Axis Bank is only acting as a distributor of the insurance products offered to by the insurance companies.
Axis Bank is not responsible or liable for performance of any obligations under the contract of insurance. Insurance is sold as a stand-alone product and not linked to any of the Banking products. Participation in Insurance is purely on a voluntary basis. Purchase of Insurance is not a pre-condition of availing any of the banking products/services.
The product information given on the website is indicative in nature. Nothing contained herein is to be construed as advice, recommendation, offer for a policy or any other assistance. Axis Bank does not guarantee that this website reflects latest amendments/ information at all times or at any time. For IRDAI grievances: igms.irda.gov.in. For more details on risk factors, product details, terms and conditions and exclusions please read the relevant product brochure carefully before conclusion of sale.
Address: Axis Bank Limited, Corporate Office, Bombay Dyeing Mills Compound, Pandurang Budhkar Marg, Worli, Mumbai - 400 025. Tel: 18604195555. Email: email.services@axisbank.com
Beware of Spurious Phone calls and Fictitious/Fraudulent offers: IRDA of India clarifies to public that:
- 1. IRDA of India or its officials do not involve in activities like sale of any kind of insurance or financial products nor invest premium.
- 2. IRDA of India does not announce any bonus, Public receiving such phone calls are requested to lodge a police complaint.
SECTION 41 OF THE INSURANCE ACT 1938 PROHIBITION OF REBATES
- No person shall allow or offer to allow, either directly or indirectly, as an inducement to any person to take out or renew or continue an Insurance in respect of any kind of risk relating to lives or property in India, any rebate of the whole or part of the commission payable or any rebate of the premium shown on the policy nor shall any person taking out or renewing or continuing a Policy accept any rebate, except such rebate as may be allowed in accordance with the published prospectus or tables of the Insurer.
- Any person making default in complying with the provisions of this section shall be liable for penalty which may extend to ten lakh rupees.