Insurance in India; what it means? – Investment series 2

A recent survey conducted by an international agency on India’s financial literacy:

• 67% of the Indian prone to think insurance as investment

• ONLY 7% people have taken term insurance, out of all who pays insurance premium

• ONLY 5% of people have health insurance

• 92% people after their retirement depend on the children and 8% who plan for retirement, 61% of them resort to insurance as retirement plan

I am sure, most of us will not find it surprising, as we are also part of it. I don’t even have to validate this data, as this is a common occurrence with most of the customers I meet.

Insurance is the most preferred “Investment avenue” by Indians, after bank FD’s. This is where the problem starts, we treat or understand Insurance as Investments. We have Insurance agents floating around virtually everywhere; family, friends, office colleagues, neighborhood agents, and lastly, relationship managers from banks & brokers… hammering same!!

Most of the time we pick up insurance because of two key reasons; first to save tax, under 80cc and second the help or push by our “dear agents”, who have given a sweet talk on retirement, kids plan or some other reasons as the sweetener.

Insurance meaning – As per Wikipedia, Insurance is a means of protection from financial loss. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss.

Therefore, as per my understanding, Insurance is meant to serve only one purpose, i.e. to cover an eventuality, in crude language, in case one dies, what next? What should be this calculation? Has any of these agents given this working & pushed same?

Answer would be a bold “NO”.

Why blame an agent? We all are educated, why don’t we demand or get into calculations for the premium amount, its working and even compare? “Comparison” is an Indian favorite pastime, we get into compering silliest of the things, why we ignore this? (Maybe it’s too personal or we don’t believe in death)

Answer again would be “we just Don’t”.

Just to illustrate, basic research on internet; this is how a usual endowment policy or a traditional plan looks like for an individual aged 30years, with annual premium of INR 25k & payment for next 30 years:

Source: www.hdfclife.com / www.licindia.in

This is what happens when we break-up premium amount, deploy & invest wisely:

Source: www.valueresearchonline.com (CAGR based on past performance) ***

By going with the second plan, first this person is covered for 1 crore, instead of 7 lacs against death. Second, funds are deployed against an asset class which offers the best returns, i.e. 7crores against just 20lacs. What else one wants? For the same premium amount. Amazed!!

Why such a big difference? Even if CAGR for Mutual funds comes down to 15%, total value comes to 70lacs, which is still higher compared to 20lacs. Insurance traditional plans typically offers its seller around 20-30% commission on 1^st year premium & around 2-5% from 2^nd year onwards, plus charges annual administrative charges.

What it means to you is that, you have less funds out of your total premium to be invested year on year, hence low returns. Whereas, in the market, for the same premium amount one pays annually, one can have plans (though separate) which will cover all benefits and returns will be many times higher.

My suggestion is simple on Insurance or Investments;

1. STOP clubbing benefits – i.e. tax saving, cover value & investments

2. STOP benevolent factor – i.e. I know him, he is my family/ friend etc.

3. Ask for what you WANT – & START comparing 😉

We at Moneyfrog.in treat insurance strictly for calculating cover value, based on customer’s data points & offer solutions accordingly. We differentiate ourselves; by the use of technology (mobile & web), innovative solutions, scientific selection & bouquet of services, which ensures customer stickiness to platform & solutions offered.

*** Mutual Funds projection shown is based on past performance. Also one needs to understand that, Mutual Funds carry markets risk and one should read the prospectus carefully before investing.

Manoj Chahar

Founder & Storyteller at Moneyfrog.in

Manoj is the founder of Moneyfrog.in, with 15 years of corporate experience & expertise in financial markets. Manoj has corporate stints with Kotak Securities, IIFL group & Philips India. He holds an MBA (PGDM) degree from Symbiosis (SIMS) Pune.
His interests include birding & adventure activities.