After seeing many such incidents, I feel that life insurance is a product which is to be purchased after a serious thought. You should not purchase life insurance as a savings instrument, but you should purchase enough life insurance for the protection of your family. If every wife knows what a widow feels, no husband will remain uninsured.
Let us understand the benefits under an endowment policy. The benefits can be classified into maturity and death benefits. Majority policy holders will survive to the maturity date and receive the maturity amount. Few will die in between and their nominee will receive the death claim.
Maturity benefits under the endowment policy:
Selvaraj took this 20-year policy when he was 35. Had he been alive till the age 55, what he would have received? He will get maturity benefits under 3 heads:
First is the sum assured under the policy, which is guaranteed. In this example, it is 10 lakhs.
The second item is a bonus. In a policy, the company may declare bonus every year but payable only on maturity or on earlier death. The bonus will depend on the profit of the insurance company and many other factors. The current bonus rate of LIC of India for 20-year endowment policy of 10 lakhs is 42,000 per year. If the same rate is continued for the next 20 years, the amount payable as a bonus will be 8.40 lakhs. (42,000 x 20 = 8. 40)
The third item is a final additional bonus, which is payable on long term policies. In the case of LIC, the current rate is 70,000 for this policy.
The total amount payable after 20 years will be the total of 10 lakhs, 8.40 lakhs and 70,000 which is 19.10 lakhs. The total premium payable under the policy is 10 lakhs in 20 years. The internal rate of return is around 6%. Are you happy with 6% return on long term investment? Some banks are offering 6% on their savings bank account!
Will the bonus improve in future?
Chances are there it may come down. The bonus rate depends on many factors. As India moves from a developing country to a developed country, the interest rates will come down. This will affect the bonus rates. So, expect only less bonus rates in future. Now most private companies are offering lower bonus compared to LIC.
Death benefits under endowment policy:
Like Selvaraj, some unfortunate few will die during the policy term. In his case, death happened in the 5th year. What is the benefit payable in case of a death? It comes under 2 heads:
- Sum assured, which is 10 lakhs in our example.
- Bonus till date of death
In our example, the nominee received 42,000 x 5 = 2.10 lakhs as bonus. His wife got 12. 10 lakhs as death benefit.
Is this insurance sufficient?
No. She cannot manage a family with 12 lakhs and is struggling now to run the family. What Selvaraj would have done to avoid such a situation? He should have purchased enough insurance, when he was alive and healthy.
How to calculate enough insurance?
They have 2 daughters aged 13 and 10. His wife is a housewife. He was earning around 1 lakh per month. The household expense including rent was 40,000.
He was investing 20,000 in RD for the higher education and marriage of his daughters. This has grown to around 8 lakhs. He was having 5 lakhs in PF and 2 lakhs as FD. His employer paid 5 lakhs as group insurance benefit. Since he was working in that company only for 3 years, he was not eligible for gratuity.
His wife got the following amount after his death:
- Insurance from LIC – 12 lakhs
- Group insurance – 5 lakhs
- PF – 5 lakhs
- FD – 2 lakhs
- RD account – 8 lakhs
The total comes to 32 lakhs. At 8% return, his wife will get 21,000 per month from 32 lakhs. It is not sufficient for running the family. With inflation, it will be impossible in future.
What Selvaraj would have done?
He should have purchased a high value policy as per his insurance needs. The amount required to ensure inflation adjusted cash flow of 40,000 for the next 45 years comes to 1.75 Crore. (This can be calculated by a financial planner for you). He should have planned for 40 lakhs for the children higher education and marriage needs. He had a net worth of 15 lakhs at that time. So, he should have gone for a 2 Crore policy. (1.75 Cr+ 40 lakhs -15 lakhs = 2 Crore).
Can he afford such a policy?
The 2 Crore endowment policy premium will be 10 lakhs per year which he cannot afford.
Term policies come with low premium
In a term policy, there is no maturity benefit. It is like the car policy, where the claim is payable only if there is a loss to the car. Term policy can offer you insurance at a low cost. You can get better rates, if you buy it online.
Online term policies – the game changer
At age 35, you can purchase the 2 Crore policy by paying around 24,000 per year. This comes to 2000 per month, which was very much affordable to late Selvaraj! This 2 Crore policy would have ensured a smooth life for his wife. His daughter’s future education and marriage would have happened even in his absence. Life insurance will not make you rich but it will ensure that your family is not poor in your absence!
Buy an online term policy of adequate value to protect your loved ones in your absence. It cost nothing compared to the huge benefit it offers.
Melvin Joseph is a certified financial planner, fellow of Insurance Institute of India. Melvin has more than 21 years of experience with LIC, Kotak Life, Bajaj Allianz, SBI Life in various positions ...
