Everybody and his dog will tell you that you need life insurance. I won’t even go into ULIPs as they are clearly devil incarnate. Even pure term insurance is not what everybody needs. I will summarize below the “reasons” people give for recommending a life insurance policy to you. Even though you don’t have any financial dependants. After a while, it becomes so irritating it is not even funny. The last “reason” is the best: even seasoned, intelligent, honest personal finance writers would tell you this one.
1. Tax benefit :
Are you for real? You get tax benefit on the money that you don’t even receive. It is like quitting your job to save taxes. Allow me to invent a sardar joke:
I once met a sardarji who was standing near a well and tearing and throwing 100 rupee notes in the well. I went to him and asked, “Sardarji, why are you throwing money down the well?”. The inimitable sardarji replied: “Bhai saab, for every 100 rupee note that I throw down the well, the government gives me 30 rupees tax break”.
2. You are worth it:
Yep, I am worth it. That is why I am spending it on a vacation in Switzerland. Or taking my girlfriend (earning well, NOT dependent on me in the least bit) to dinners in the Zodiac Grill, Taj Mahal Palace. NOT buying a stupid life insurance policy.
3. Premiums are lower if you start young:
Most unsuspecting suckers would fall for this. The beauty of this is: it sounds correct. And the real calculations are a bit complex. Not complex enough that you can’t do them but just enough that you get lazy and get suckered into buying a policy. If you don’t want to go into calculations, here is the crux of the counter argument: the premiums are ZERO when you are not insured. This is lower than any life insurance premium you will come across. These saved premiums can even be invested to earn you more money.
Since the calculations are “complex” you are too lazy to do them. But not to worry, I don’t call myself Business Pandit for no reason. Lets get cracking:
The example considered here is from SBI Life insurance. (The website of LIC is down today). There is this Mr. Sucker, 25 year old in 2009. No dependants. Question is to insure Mr. Sucker for Rs. 10 lakhs up to an age of 40 years(2024). He acquires a dependant (say, Mrs Sucker, and no, it’s not funny) when he is 30 years old(2014). Competition is between the following 2 ideas:
A. Get a life insurance at an age of 25 to take advantage of the “low” premiums. This is a policy for 15 years. Premium is Rs. 1954 per annum. Total premium Rs. 29,310.
B. Remain uninsured until the age of 30, and then get a policy for 10 years. Premium is ZERO for the first 5 years and Rs. 2150 for the next 10 years. Total premium 21,500.
Money saved with plan B is Rs. 7,810. This is not even considering that most of the money was saved in the earlier part of the plan which could have been invested. Skip the following block if calculations bore you.
Let us calculate the total cost of insuring Mr. Sucker in year 2024 rupees. Post-tax pre-inflation rate of return considered is 8%.
Cost of plan A = 1954*(1.08^14) + 1954*(1.08^13) + … + 1954
= 1954*(1.08^15 – 1)/(1.08-1)
Cost of plan B = 2150*(1.08^9) + 2150*(1.08^8) + … + 2150
= 2150*(1.08^10 – 1)/(1.08-1)
So in 2024 value of rupee, 53055-31146 = 21909 rupees are saved.
1. Traditional media will not tell you the dangers of life insurance mis-selling. Life insurance companies are big advertisement spenders. Pissing them off is dangerous for any advertisement funded media (newspaper / magazine / TV channel / websites that write their own content). It is only some bloggers who will tell you the truth as we are not dependent on advertisement for our livelihood.
2. Yes India is severely under-insured. Yes we as a society need to encourage life insurance companies. No, this does not mean allowing 420 behaviour in life insurance.