“The most astonishing aspect of human behaviour is that they know they are mortal, but behave as if they are immortal.” —Yudhisthir in Vana Parva of the Mahabharat.
Imagine you are out driving with your family on a weekend. All of a sudden, an irresponsible biker arrives out of nowhere and you are forced to take a sharp turn. You end up crashing your car into a tree nearby. No one is hurt but the car is badly damaged.
Your first reaction would be to thank God for saving you and your family. About your car, you tell yourself not to worry, because you have a zero depreciation insurance policy drawn on it. It will be new again.
This is how most of us would react. We look at the extent of the damage to the car, its monetary impact and the way it can be mitigated. What about the possible risk to the life of the driver or passengers and its implications on the family? It does not sound rational, but somehow, we value our cars more than we value our lives.
So what deters us from purchasing financial protection for ourselves?
We want tangible benefits
Most of us as car owners will spend considerable time trying to get the best insurance cover because we are able to visualize the possibility of a loss and may even go beyond the mandated car cover to protect it from this possible loss. We are comfortable paying Rs20,000 as premium for a car worth approximately Rs10 lakh.
No return on protection products
For most of us, it is difficult to imagine the concept of pure risk. We are uncomfortable with the idea of having to pay for a financial product such as term insurance which does not offer any tangible returns in case we live. Do we ask about returns when there is no claim in a given year for our car? For investments and returns, there are savings plans. These plans are usually long-term, goal-based instruments. But if the earning member is not there, no savings plan would be sufficient.
An adequate term insurance plan ensures that the financial needs of our family are met irrespective of what happens to us.
Life insurance equals to tax savings
The benefit of financial protection is unique, which is provided only by life insurance products. They have been available for a long time. However, these products have been treated as instruments for tax-saving rather than a must-have for financial protection.
What needs to change
Financial protection needs to be looked at differently. It should not be viewed only with an investment lens or for the purpose of tax savings. It serves as a replacement of income in the absence of the earning member. Term insurance needs to be the first step in financial planning. Protect before you save.
Term insurance is one of the most cost effective ways to purchase financial protection. Let us look at a simple example to understand this. For a 30-year-old, a term insurance plan with a life cover (or sum assured) of Rs1 crore is available for approximately Rs8,000-10,000. This is also the amount of money that we usually pay as insurance premium for a car costing about Rs5 lakh. The same amount of protection, if purchased using a savings insurance plan, would cost Rs10 lakh. A sum assured of Rs1 crore at 8% interest per annum, provides a monthly income of approximately Rs65,000. A person having an expenditure of this amount can secure her family’s future, thereby ensuring that the family continues to receive regular income even in her absence.
When buying term insurance, earlier the better. The premium for your term policy remains constant for the entire term. If you purchase your term policy at the age of 30, you would pay Rs8,000-10,000 for a life cover of Rs1 crore. If you were to purchase the same policy at the age of 40, you would pay a premium ranging between Rs18,000 and Rs20,000. Even if you are purchasing a term plan at a higher age, the higher premium should not be a deterrent. Financial protection is a must as long as you have dependents.
Moreover, technology has made it easier for consumers to understand, compare and purchase life insurance. Thanks to increasing awareness of financial products and the digital platform, information on term products is readily available. You can compare these products as well as purchase them online, as per your convenience.
While a term insurance plan can be purchased easily, in addition to comparing prices, you may look at the brand, and the claim settlement ratio of the company. Claim settlement is an important factor. It is the ultimate service differentiator for a life insurance company. What is equally important is the time taken to settle claims.
We have a natural instinct towards protecting things that we value. It is not that we do not value our lives enough. But somewhere, we have to extend the attitude of protection that we so well understand for our assets, to our most valuable possession—our lives.
Sandeep Batra is executive director, ICICI Prudential Life Insurance Co. Ltd.