Your money: Buying insurance? Don’t chase returns, maximise risk cover

Acquaintances often request me to suggest life insurance products that can fetch high returns. Occasionally, they are subjected to product presentations by insurance advisors, showing returns that make them thrilled but also make them circumspect on whether the insurance products can really earn such high returns.

Here are a few very pertinent points that one must keep in mind before buying a Life Insurance policy.

Returns from life insurance.

Returns under conventional par products can be high if you buy them at a very young age (preferably before you turn 25) and also with a policy with the term of 25 years or more. If you can take a whole life policy, the returns can be the highest possible. At a young age, premium is significantly lower than the same policy taken at, say, 40 or 45 years. When one buys a policy at an older age, he ends up paying a significantly high premium and may also have to pay an extra premium for adverse health conditions that set in at higher ages. All this makes the return under the policy even less for him. So, the late realisation of the fact that there can really be no substitute for life insurance, can be costly in all respects. Again, at higher ages, people may not be eligible for a long-term policy and their prospect of earning high return diminishes significantly.

Level of premium
The factors that determine the level of premium remain the same under all insurance plans – mortality, interest rate and expenses. The job of the insurers is to study the historical data and make rational assumptions about the future mortality, interest and expenses. This helps them in arriving at the right premium for the proposers. These assumptions are the same for calculating tabular premiums under all the plans. Various products are developed only by altering the premium payment options and the time of pay-outs.

Some products can offer additional facilities; for instance, return of premium under a term plan if the customer is alive on the maturity date, extension of protection even after the maturity date, increase in sum assured after every few years during the term. All these are factored in by the insurers, while determining the premiums. There is no question of one product earning a better return than the other.

Non-par products
Non-par products promise to give you an assured sum. In some non-par products, there are guaranteed additions to the sum assured. But we have to keep in mind that the customers fully pay for these guaranteed additions and the insurers have no difficulty in paying these guaranteed additions. In fact, it is now found to be more profitable for insurers to sell non-par products.

What about the product presentations that show high returns offered by some products? Are these for real? No, they are not. These are incorrect representations of the returns under the policies. One has to do some calculation to determine the internal rate of return of the inventments. The intermediaries who fail to sell insurance on its merits cook up such faulty strategies.

Life insurance is all about taking a call on which risks you want to manage. It depends on your life situation. Premiums are higher when a lot of pay-outs are available during the term of the policy. Insurance advisors talk about the return under a policy only because a large section of the market is keen on getting attractive returns only.

The writer is an insurance industry analyst

TAKING COVER

• Mortality, interest rate and expenses determine the premium you pay
• Premiums are higher when a lot of pay-outs are available during the term of the policy
• If you can take a whole life policy at a young age, the returns can be the highest possible