By Mr. Sai Srinivas Dhulipala, Bajaj Allianz Life
Insurance
The returns on a life insurance policy often seem
to be a very confusing concept. This is true not just to a policyholder, but
also to all other stakeholders - intermediary, life insurer, and sometimes even
to the shareholders.
More often than not, the industry as a whole and
all these stakeholders insist that the returns on a life insurance policy are
low.
The returns from a traditional savings product
range between 3% to 5% and they are on the lower side when compared to any
other savings instrument.
But, while comparing these returns with other
savings instruments, people tend to forget two basic factors.
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| Sai Srinivas Dhulipala, Bajaj Allianz Life Insurance |
The first and most important factor is that a
life insurance product ensures protection of loved ones in unforeseen
eventualities and was not originally designed as a savings product.
One primarily pays for the insurance cover in a
life insurance plan. The cost of life insurance goes up as people get older as
the probability of death increases with age and hence the cost of insurance
cover also rises.
When the reality on this cost of insurance is
ignored by policyholders, it leads to huge mis-selling. Since policyholders are
looking only at returns from an insurance policy, some intermediaries mislead
them by indicating very high returns.
Surprisingly, sometimes the return promised is
higher than any other savings vehicle! To reiterate, life insurance equips one
to face the uncertainties of life and protects against the financial losses
resulting from death.
The insurer promises to pay one’s beneficiary a
specific amount of money when a person dies in exchange for timely payment of
premiums. And, savings is another aspect of life insurance which helps one meet
financial goals in life.
The other important factor is commission to the
intermediary. One pays commission for the financial advice he or she receives.
But, Indians generally don’t like this idea of
paying for advice. We need to realise that insurance is a complicated product
and hence you need advice. If you are really an informed customer and don’t
need advice, you may want to buy online policies.
There are some practices in the market to share
the commission with the policyholder.
Therefore, prospective policyholders should come
out of these confusions. You are paying for the cost of insurance and hence you
need to exclude this cost from the calculation while calculating returns on
your insurance policy.
The returns then will be comparable to any other
stable investment vehicle.
If you really do not want to invest your savings
in an insurance policy and if you only want insurance protection, you should
buy a pure term insurance policy.
The decision to purchase a life insurance product
cannot be based only on the returns. There are other features of the product
that should be highlighted.
For example, death benefit, guarantees, any other
benefits like additional accidental cover etc.
The writer Sai Srinivas Dhulipala is the appointed actuary in Bajaj
Allianz Life Insurance.
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