The need to cover the death risk should be predominant of all the needs

Life Insurance Products cover the risk of financial losses due to premature death. They also cover the risk of living too long by making payment in a lump sum or installments at old age. But generally, the risk coverage in life insurance means covering the risk of financial losses due to the death of the life insured.

Most of the life insurance products are sold as risk covering devices though the saving portion in the premium is higher than the share of the premium for risk coverage. In other words, though life insurance is identified with the coverage of death risk, yet a major share of the premium is allocated to saving and investment to give a reasonably good return to the policyholder.

Such products are known as Endowment Policies. Ironically, though the premiums in such types of policies are very high, coverage of death risk is quite low.

The policyholders are happy that at the time of maturity of the policy they would be getting much more than what they had paid. But some policyholders are impatient to wait so long to get the maturity benefits. They want to enjoy the maturity benefits under their policies during their lifetime.

The insurance companies are too glad to develop products for them where part of the sum assured is available after every four to five years and balance is paid at the time of maturity. These policies were popularly known as Money-Back Policies and are in great demand.

Premiums in these policies are still higher though death risk remains the same in comparison to the policies where maturity benefits are paid only once at the end of the term of the policy. Such products suited both the insurers and the agents and also liked by the policyholders.

But there is lack of realization on the part of the life insured that if he dies during the term of the policy, the sum assured paid to the family would be very meager and could not even marginally substitute the income he was contributing for the maintenance of the family during his lifetime.  

From 1956 to 1999, Life Insurance Corporation of India was the only insurance company providing life insurance covers to the general public. In the early days, most of the policies sold were either an endowment policy or a money-back policy (called anticipated policy also).

In endowment type of policy, the life assured will select a premium paying term, say, 15, 25 or 30 years and at the end of the term, called the date of maturity, shall receive the sum assured (the face value of the policy) along with the vested bonus if a policy was with profit. In case of death at any time during the term of the policy, the sum assured along with the bonus up to the date of death would become payable to the family.

Compared to endowment policies, money-back policies were loaded with higher premium even though the amount of risk coverage remained the same.

Later on, endowment policies with higher risk coverage, called Double Benefits or Triple Benefits Insurance Plans, were introduced. In such type of policies twice or thrice of the sum assured was paid in case of death during the term but on maturity, like in endowment, only sum assured (face value) of the policy was paid.

In such policies, though the premiums were marginally higher, the risk coverage (death benefit) was double or triple in comparison to simple endowment products. Double and triple cover products were well taken by both the insurance salespeople and the customers despite the higher premiums.

The development of these products was a single greatest positive step towards the realization of the basic purpose of insurance, that is, coverage of the risk.

There was a great demand for some products, which could cover the risk of death at a cheaper rate. Hence a product was developed by Life Insurance Corporation of India, then the only institution to sell life insurance, wherein case of death, during the term of the policy, the full sum assured was paid but if the life assured survived the term, all the premiums paid were returned to the insured with some additions (called loyalty additions).

There was also a provision of free cover for a reduced sum assured for another 10 years. A 30 years old young man could get a cover of Rs.3 lacs for 30 years by paying approximately Rs.3600/- per annum (about Rs.10 a day). This type of insurance was called Term Insurance With Return of Premiums.

Under such policies, the amount of risk coverage was much higher than the amount paid on maturity. The premiums under such a policy were much less than under an endowment policy with profits wherein the life assured was receiving full sum assured along with bonuses etc. on the date of maturity.

With the opening of the insurance sector, the new insurance companies are vigorously marketing various insurance products. Most of these products are endowment insurance or money-back policies or term insurance with return of premiums. But two products, which received greater attention at the hands of private insurers are whole life plans and pure term insurance. In whole life plans, as the term suggests, the risk is covered throughout the life span of the life assured and the sum assured is paid on death to the beneficiaries.

The life assured has to pay premiums throughout his life but whole life policies with a single or limited number of premiums are also available. Whole life policies are cheaper in comparison to endowment policies. Though sum assured and bonuses are payable only on death yet the life assured can raise a loan on the policies to meet urgent financial commitments.

The best aspect of whole life products lies in the life long cover of death risk at a reasonable premium. The family of the life assured is protected against the risk of death of the assured. At a young age, one may not realize the usefulness of a whole life policy but at an advanced age when one finds that all the insurance policies had matured, and a new cover at that age was not easily available or even affordable, one would wish that if he had a whole life policy, he would have not nominated uninsured even in old age.

The substantial credit of boost in the sale of whole life products will go to the new players who have launched whole life products will suitable modifications to attract the customers. If we go by the trends in the west, the whole life products have great potential in the country.

Life insurance primarily an instrument of risk coverage

It is once again reiterated that life insurance should primarily be taken as an instrument of risk coverage. The basic purpose of buying insurance should be to protect the family from the loss of income due to the early death of the main income earner.

The financial consequences of the early death of the main income earner can be disastrous for a family. The only effective solution to manage death risk lies in buying adequate life insurance cover. Saving should be a secondary purpose of buying life insurance except for those who have no family liabilities.

A person has a lot of other instruments of saving. He can invest in PPF/Mutual Funds/Post Office/Bank Deposit/RBI bonds/Unit-Trust and see his money grow by such investments. In old age all these savings and investments, which may also include his own house, and other retirement benefits, if he was in a job that provides pension, could be of great financial help to him.

But all these assumptions, that a person will have a lot of funds in his old age, rests on one presumption that a person lives to see this old age. In case of early death, the savings are not accumulated sufficiently to help the family survive on the funds for a long time. Only a life insurance cover can fill this gap. The product that can provide adequate coverage at a very economical rate, particularly, if one is comparatively young is Pure Term Insurance.

Pure Term or Term Assurance is a product that covers only the risk of death during the term of the policy. In other words, under a term insurance plan sum assured is payable only if the life assured dies during the term of the policy. Nothing is payable if he survives up to the term. Premiums under such policies are quite low.

These products are mainly designed to cover the risk of death. Such products are perhaps closest to the main philosophy of insurance, that is, covering the risk of death, by creating a common pool of equitable premiums, collected from a large number of policyholders, and thus sharing the losses of few (those who meet the unfortunate death) by the contribution of all. As stated, the term assurance policies can cover a large amount of risk at a very low premium.

A 30 years old young man can buy a cover of Rs.10 lacs for a term of 20 years (30 years term premium was not readily available) by paying an annual premium of around Rs.3500/- (it comes to less than Rs.10/- a day). It will cost him less if he buys the same policy for a term of 10 years (as the death risk is being covered for 10 years instead of 20 years). Different insurance companies have different rates but the variation is not much.

But with the same amount of premium (Rs.3500/-), he will get an endowment policy of only Rs.70,000/- or so for 20 years. In the above example, in case of death of the life assured during the term of the policy, the death benefits under term assurance will be Rs.10 lacs while under endowment assurance a meager sum of Rs.70,000/- plus some bonus additions.

However, under term assurance policy nothing is payable if the life assured survives the term but under endowment policies, the sum assured i.e. Rs.70,000/- plus bonus will be payable to the life assured on the date of maturity.

Let us discuss the above two products, i.e. Term Assurance and Endowment Assurance in more detail. The term assurance is a product that covers only the death risk during the term of the policy. Say, if someone purchases a term assurance policy for ten years, then the risk is covered for 30 years.

Generally, the maximum term in a term insurance policy is 30 years or a term up to age 60 whichever is lower but most of the insurers would like to cover the risk up to 20 years. Longer the term, more the risk to the insurer and, therefore, the insurer may be comfortable in selling short term insurance than the long term.

But the customer’s point of view, a long-term cover will be more useful and also will be by the basic principles of insurance. The insurance companies would prefer to quote premiums for 10 or 15 years term than 20 or 30 years term. A widely read and respected financial magazine of India is quoting premiums for 10 years term insurance of various companies.

We fail to understand why it does not quote premiums for 20 and 30 years terms also. Lately, a new insurance company in their brochure of a term insurance plan has cited the premium on the life of a young man of 30 years for a 10 lacs policy for 10 years term. Why they could not quote premiums for 30 years term or both for 10 and 30 years terms in the same example.

If a young man of 30 buys a term insurance plan for 10 years term then after the expiry of 10 years, he becomes uninsured. Should he buy another term insurance after 10 years to keep himself insured? Instead, why he is not advised to buy the term insurance plan for 30 years term from the very beginning, which is generally the maximum term provided by the insurers under term insurance plans.

Here we must know that in terms of insurance longer the term higher the risk to the insurer and also higher the premium to be paid by the insured. The disadvantage in buying a short term insurance plan is that after the expiry of the term, the insured may not get anther term insurance protection due to becoming uninsurable by getting afflicted from some disease or disability or sickness and also because of higher age and some other adverse health reason, he might have to pay a much higher premium.

The need to cover the death risk should be predominant of all the needs.

Most of the insurance is bought for the protection of the family in case of the premature death of the main income earner in the family and if the main income earner does not have adequate insurance cover between the age 45 to 55 (the time when the cover is needed most), then in case of some unfortunate happening, it can be disastrous for the family.

Therefore, there is no reason why a young man of 30 is not advised to buy a term insurance cover for a maximum available term, which is generally 30 years. A 30 years term insurance plan will keep him protected against death during the term. One can reasonably accept that by the time a person reaches the age of 60, he would have accumulated sufficient savings to take care of his future liabilities at that age.

Now the new insurance companies have formulated some products, which give the customer a choice to determine the level of risk coverage and saving element in the premium. In other words, the customer is being given a choice to select the quantum of the death benefit as well as saving benefit within the same premium. It is heartening to note from some news reports that LIC of India is contemplating to make its pure term insurance plan flexible and more attractive.

There are several products available with each insurer. All that is needed is to educate the customers of different products to suit their special needs. But the need to cover the risk of death should be predominant of all the needs.


                                            By Mr. S. M. Manchanda, Published in Life Insurance Today, July 2006

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