Insurance: 'Is your car worth more than your life?'

Have you ever asked yourself 'How much am I worth'? I am not talking about your net asset worth, or your liability worth or your liquidity worth. I am asking about what the insurance company will pay your family in case of any unfortunate eventuality. The answer will come as a shocker to most of us. A majority of us will be worth around Rs 5-10 lakhs only.

I was living in the US for 5 years before coming back to India in 2001 and was looking for ways of investing money.

I talked to my aunt who is a banker and my mother who is a teacher. Both of them unanimously asked me to get an insurance policy as it would fetch me returns in the long term and moreover do what it is supposed to do, insure my life. Great, I thought and started talking to an uncle, a family friend, a friend's dad and a sundry more, all of them insurance agents. 

Everyone had almost the same product to offer, Rs 5-10 lakh insurance cover with an accident rider, returns in the form of endowments, money back or pension and finally, the most important aspect of all, tax saving. All the products were more or less the same and had purposeful names.

I was armed with a lot of information and was ready to buy some policy or the other which would give me Rs 10 lakhs coverage and a lot of returns. Then a young insurance agent arrived and he changed the way I perceived insurance and investment. He asked me a lot of questions about my salary and my expenditure, my expensive gadgets, investments etc, made notes and left promising to get back to me the next day.

No one else had done this before, they just offered their products. This guy was great; he was selling to me what I wanted rather than what he wanted to sell. An excellent salesman!

He came back the next day saying that if something were to happen to me, my family would be able to continue with the same lifestyle provided my life is covered for Rs 40 lakhs. I was happy, "Yes, I am worth Rs 40 lakhs. I want that insurance, baby," was my initial reaction.

• How to choose the best insurance policy

He also said that the cover was for 20 years and after that I would get back around Rs 50- 60 lakhs based on the then market conditions. However he did not commit the exact amount.

Then came the real scary part; the premium I had to pay would be Rs 1.2 lakhs a year. "Are you crazy, I have a salary of Rs 5 lakhs a year and I have to pay Rs 1.2 lakhs a year as insurance premium?" I thought.

I said that it was impossible for me to pay that much money. He immediately offered me the traditional Rs 10 lakh insurance saying that the premium would be lesser by around Rs 20-30k per year. I politely asked him for time and sent him away.

Then my mind set off rolling. I definitely wanted to get my life covered for Rs 40 lakhs as that is what my life is worth. But I did not want to pay a premium of Rs 1.2 lakhs. In the US my life was insured for one million dollars automatically the moment I started to work in my first company.

I did a lot of research and found out that the solution to my high life coverage policy with a smaller premium was term insurance. The cheapest insurance cover that one can buy and one MUST buy.

It is just the same as your home insurance against natural calamities and theft, your car insurance against accidents and theft etc. That is, you pay a premium and will get back the sum assured only in case of damage, accident or death in an individual's case.

This is pure insurance. This is how you can get high life coverage.

This is how you pay a minimum premium (mostly around Rs 250-300 per year per lakh).

This is how even the endowments policies and other money back policies work.

What I mean is when you go for an endowments/money back policy by paying premium of say Rs 10,000 for a life cover of Rs 5 lakhs, your premium amount goes for the following.

• The best term insurance policy for YOU!

~ Rs 1,500 for buying primary insurance for Rs 5 lakhs. (Rs 250-300 per lakh)

~ Your friendly agent's commission. Around 35-50 per cent for the first premium and around 5-10 per cent for every renewal thereafter

~ The balance goes towards buying government bonds, infrastructure funds or in equity (as in the case of ULIPs)

And what are you getting in return? Paltry life coverage of Rs 5 lakhs! And a final return which might just be able to beat the inflation rate when your policy matures. But isn't it the life coverage that you were looking for initially?

Now you know why your insurance agent offers to give you a 30 per cent discount on your first premium.

Now you know why s/he sometimes pays the premium on your behalf and later gets it from you.

Now you know why so many individuals have left their full time jobs at the bank and other government organisations to become insurance agents.

Great profession I thought. In the US people do not sell insurance, insurance sells itself.

The bottom line is never combine insurance with investment.

If you get back money while you are alive, it is not insurance. You can get Rs 40 lakhs insurance cover for Rs 10,000 premium if you opt for a term policy.

You are paying Rs 10-15k per year insurance for your mid-sized car and never think of returns. So why do you always think what you should get back returns when you want an insurance policy. Is your car worth more than your life?

I discussed all this with my family friend agent and a couple of days later, my mom and aunt scolded me for not opting for money back policies. I wonder how news leaked so fast!

My agent uncle once asked me to take insurance as he was unable to meet his targets. He asked me to pay a couple of thousands as premium per year for Rs 2 lakhs insurance. His son, my mother, my aunt and many other relatives bought policies from him. I asked him to give me a term policy.

• Insurance is not investment. Here's why

He never got back to me. He thought I was crazy as all the people he knew (and as a matter of fact I know) had insurance coverage of Rs 5-10 lakhs and were happily paying Rs 10-20k as premium every year.

Having said all that, here is a short take on why one must go for term insurance instead of money back policies.

There are two golden rules you must follow when you buy life insurance

~ Never combine insurance with investment, that is, money back policy and ULIPs

~ Do not forget rule number one above