In any activity of life there is a possibility that a desired event may fail to occur and that pecuniary
(financial) loss may arise. In adventures by sea the ship may fail to make the port (remember Titanic!);
or the cargo may be damaged or lost. In the adventure of life itself, the life may fail and death may
occur, causing suffering to dependants. Death comes to all sooner or later, and it is the only truth in
this world. The rest as they say is all maya (illusion). So if death is the only truth, then why do we
ignore the implications of the event? Because of the nature of its permanence, and all pervasive; death
requires understanding the financial implications on the dependents. Life insurance is therefore the
most important of all forms of insurance. It’s significance pales the other forms of not just insurance
but also all investment instruments. The theory of insurance, in general terms, may be expressed to
mean that the good fortune of the many compensates for the misfortune of the few. The consequences
of such misfortunes cannot be in many instances borne by the individual, and so the insurance
company is prepared to shoulder the burden of these consequences in exchange for an assessed
payment for the risk undertaken. Those who avail themselves of this service know that such
misfortunes will occur but do not know to whom, and when, and they are willing to make such
contributions to a common fund to buy the right to be compensated of misfortunes if they should befall
them.
The insurance company is concerned with any factor that may affect normal longevity, and once the
contract is entered into, and premiums are regularly paid by the policyholder, the company is at a risk
on a permanent contract which it cannot break.
From the collation of a vast amount of data, an assessment can be made of the rate of mortality or the
likelihood of death occurring at each age. Numbers can be quoted, but which individuals will die at
each age cannot be stated. Consequently, all who pay life insurance premiums to the common fund do
so with the same willingness that the fund shall be used to compensate the estates of those contributors
at whatever age in life they may die, within their respective contract period. This is the basic theory of
life insurance. However increasing emphasis on investment aspects has tended to overshadow the
primary purpose of protection against premature death.
Let’s discuss the following two significant statements relating to life insurance.
1. Life insurance has no competition from other financial products:
Life insurance relates to protection of the economic values of assets. It is a mechanism
that helps to reduce the effect of any adverse situations arising out of loss of the asset. It
makes sure that the value or income is not lost.
Life insurance helps to compensate the financial losses arising out of death/ accident/
retirement of the bread winner in the family.
All other financial products such as bank deposits, PPF, NSC, are savings instruments,
and offer you safe returns of 8-10% p.a.
Investment vehicles such as mutual funds, stocks; offer better return potential with
higher risk potential too.
On the loss of income due to unfortunate death of the bread winner in the family, it is only life
insurance that offers a guaranteed sum to the dependants of the deceased. That is, on payment
of first premium installment and subsequent issuance of policy, a future estate is created for
the benefit of the dependents of the life assured; which is payable to the nominee in case of
unfortunate death of the life assured.
Thus, for investment purposes, life insurance may have competition from other financial
instruments, but there is no competition as far as risk coverage/ protection of economic value
of assets is concerned.
Example:
Amount invested: Rs 10000 p.a.; age: 30 yrs
Product
name
Bank
deposits
PPF/NSC
Mutual fund
stocks
Life insurance
(pure term plan)
risk cover: 25 lakhs
Returns
p.a
8%
8%
20%*
40%*
nil
Total
value
after 1 yr.
10800
10800
12000
14000
nil
►*-returns not guaranteed, depends on share market movements
In the above case, in case of death of the life assured, the nominee would get Rs 10800 through
the bank deposit, PPF and NSC. The MF investment would give Rs 12000, and the stock
investment would provide 14000.
However, life insurance would provide the entire sum guaranteed. i.e. Rs 25 lacs.
Thus, it is only through life insurance that a future financial or monetary estate can be created
during the lifetime of the individual.
In this illustration we had assumed the risk cover was Rs 25 lakhs. How do we decide how
much risk cover to buy? Is it possible to buy any amount of cover, and how much is enough.
That question is significant since most people who bought life insurance in India, have low risk
covers. They live in an illusion that they have purchased a life insurance policy, and therefore
need not worry. However, the risk cover being grossly inadequate, their dependents would not
be getting a financial estate that compensates the human value of the bread winner, in case of
his unfortunate death.
Let’s take a case: Mr A is the policyholder and life insured. He had purchase a pure term
insurance policy for Rs 1 lakh sum assured some years back. He, being the sole bread winner
in the family and earning a gross income of Rs 30,000 per month i.e Rs 3,60,000 per annum
dies unexpectedly when still young, leaving behind dependents in the form of his wife and
children. What will the nominee (wife) get from the insurer? Yes, not greater than 1 lakh, that
being the sum assured. Will it be adequate to meet the financial obligations of the dependents
in the short term and long term, such as immediate bills that will be due, the children’s
education needs-present and future; pension needs of the widow…and so on. The picture looks
rather grim.
Therefore, merely having a life insurance cover for name sake, is not enough. It is like little
knowledge. It’s better to have no knowledge so that you are recipient to new ideas and willing
to accept and change. Likewise, we witness lots of persons who have purchased some
insurance cover, without understanding why, and even among them a significant percentage
who stop paying premiums after a period, leading to large lapsations. The agent/ advisor
should therefore, change the traditional ways of selling and adopt more scientific and
professional approaches while soliciting policies from prospective clients. A need analysis of
the client should be carried out, his Human Life Value/ HLV should be ascertained, and after
matching his requirements for various future financial obligations and aligning them with his
present risk covers purchase; the agent should recommend appropriate insurance plans to meet
the shortfalls. This approach will be useful to the proposer since he will know the real objective
of buying the risk cover. A need based analysis of the client shall determine the insurance
covers he requires and also the net cash available to the proposer to invest. Thus higher outlays
can be planned to meet greater fund requirements in the future.
(financial) loss may arise. In adventures by sea the ship may fail to make the port (remember Titanic!);
or the cargo may be damaged or lost. In the adventure of life itself, the life may fail and death may
occur, causing suffering to dependants. Death comes to all sooner or later, and it is the only truth in
this world. The rest as they say is all maya (illusion). So if death is the only truth, then why do we
ignore the implications of the event? Because of the nature of its permanence, and all pervasive; death
requires understanding the financial implications on the dependents. Life insurance is therefore the
most important of all forms of insurance. It’s significance pales the other forms of not just insurance
but also all investment instruments. The theory of insurance, in general terms, may be expressed to
mean that the good fortune of the many compensates for the misfortune of the few. The consequences
of such misfortunes cannot be in many instances borne by the individual, and so the insurance
company is prepared to shoulder the burden of these consequences in exchange for an assessed
payment for the risk undertaken. Those who avail themselves of this service know that such
misfortunes will occur but do not know to whom, and when, and they are willing to make such
contributions to a common fund to buy the right to be compensated of misfortunes if they should befall
them.
contract is entered into, and premiums are regularly paid by the policyholder, the company is at a risk
on a permanent contract which it cannot break.
From the collation of a vast amount of data, an assessment can be made of the rate of mortality or the
likelihood of death occurring at each age. Numbers can be quoted, but which individuals will die at
each age cannot be stated. Consequently, all who pay life insurance premiums to the common fund do
so with the same willingness that the fund shall be used to compensate the estates of those contributors
at whatever age in life they may die, within their respective contract period. This is the basic theory of
life insurance. However increasing emphasis on investment aspects has tended to overshadow the
primary purpose of protection against premature death.
Let’s discuss the following two significant statements relating to life insurance.
1. Life insurance has no competition from other financial products:
Life insurance relates to protection of the economic values of assets. It is a mechanism
that helps to reduce the effect of any adverse situations arising out of loss of the asset. It
makes sure that the value or income is not lost.
Life insurance helps to compensate the financial losses arising out of death/ accident/
retirement of the bread winner in the family.
All other financial products such as bank deposits, PPF, NSC, are savings instruments,
and offer you safe returns of 8-10% p.a.
Investment vehicles such as mutual funds, stocks; offer better return potential with
higher risk potential too.
On the loss of income due to unfortunate death of the bread winner in the family, it is only life
insurance that offers a guaranteed sum to the dependants of the deceased. That is, on payment
of first premium installment and subsequent issuance of policy, a future estate is created for
the benefit of the dependents of the life assured; which is payable to the nominee in case of
unfortunate death of the life assured.
Thus, for investment purposes, life insurance may have competition from other financial
instruments, but there is no competition as far as risk coverage/ protection of economic value
of assets is concerned.
Example:
Amount invested: Rs 10000 p.a.; age: 30 yrs
Product
name
Bank
deposits
PPF/NSC
Mutual fund
stocks
Life insurance
(pure term plan)
risk cover: 25 lakhs
Returns
p.a
8%
8%
20%*
40%*
nil
Total
value
after 1 yr.
10800
10800
12000
14000
nil
►*-returns not guaranteed, depends on share market movements
In the above case, in case of death of the life assured, the nominee would get Rs 10800 through
the bank deposit, PPF and NSC. The MF investment would give Rs 12000, and the stock
investment would provide 14000.
However, life insurance would provide the entire sum guaranteed. i.e. Rs 25 lacs.
Thus, it is only through life insurance that a future financial or monetary estate can be created
during the lifetime of the individual.
In this illustration we had assumed the risk cover was Rs 25 lakhs. How do we decide how
much risk cover to buy? Is it possible to buy any amount of cover, and how much is enough.
That question is significant since most people who bought life insurance in India, have low risk
covers. They live in an illusion that they have purchased a life insurance policy, and therefore
need not worry. However, the risk cover being grossly inadequate, their dependents would not
be getting a financial estate that compensates the human value of the bread winner, in case of
his unfortunate death.
Let’s take a case: Mr A is the policyholder and life insured. He had purchase a pure term
insurance policy for Rs 1 lakh sum assured some years back. He, being the sole bread winner
in the family and earning a gross income of Rs 30,000 per month i.e Rs 3,60,000 per annum
dies unexpectedly when still young, leaving behind dependents in the form of his wife and
children. What will the nominee (wife) get from the insurer? Yes, not greater than 1 lakh, that
being the sum assured. Will it be adequate to meet the financial obligations of the dependents
in the short term and long term, such as immediate bills that will be due, the children’s
education needs-present and future; pension needs of the widow…and so on. The picture looks
rather grim.
Therefore, merely having a life insurance cover for name sake, is not enough. It is like little
knowledge. It’s better to have no knowledge so that you are recipient to new ideas and willing
to accept and change. Likewise, we witness lots of persons who have purchased some
insurance cover, without understanding why, and even among them a significant percentage
who stop paying premiums after a period, leading to large lapsations. The agent/ advisor
should therefore, change the traditional ways of selling and adopt more scientific and
professional approaches while soliciting policies from prospective clients. A need analysis of
the client should be carried out, his Human Life Value/ HLV should be ascertained, and after
matching his requirements for various future financial obligations and aligning them with his
present risk covers purchase; the agent should recommend appropriate insurance plans to meet
the shortfalls. This approach will be useful to the proposer since he will know the real objective
of buying the risk cover. A need based analysis of the client shall determine the insurance
covers he requires and also the net cash available to the proposer to invest. Thus higher outlays
can be planned to meet greater fund requirements in the future.
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