In the places where I worked, during my interaction with employees while helping them to plan their taxes, I used to quiz them the reason why they bought a life insurance policy for themselves. I have compiled below some ten reasons (in the order of their popularity) why they did so. This is not a broad based scientific survey, but gives an indication where people go wrong when they buy their life insurance cover.
Reason No.01 – I want to save tax
It’s true that Section 80 of Income Tax Act provides deduction of the amount paid as insurance premium (with some exceptions) from the assessee’s taxable income subject to limits. If the sole purpose of buying insurance is to save on tax, then it’s the costliest way to do so. If someone does this early in his/her life with policies like endowment or money back or even ULIP, their ability to create wealth diminishes by a very high degree.
Reason No.02 – I want to save/invest
In my opinion, this is the worst reason for someone to buy insurance. Savings is generally understood as the amount remaining with a person after he/she meets all his/her expenses and other cash needs. If one has to build wealth, savings need to be channelised into an investment with specific time horizon and goal. But purchasing an insurance policy is neither savings nor investment. It’s simply effort going waste.
Reason No.03 – My agent asked (forced) me to buy this policy
This is one of the commonest reasons you hear if you ask some one why he/she bought insurance policy. Insurance advisors are drilled to think that “insurance is always sold and never bought” and this results in an advisor selling insurance for all wrong reasons. Survival of the insurance advisor is the sole driver here and not the need of the buyer.
Reason No.04 – I want to plan for my retirement
Insurance companies have devised these products keeping in view the tax exemption available under the Income Tax Act. The same reasoning that insurance is not an investment product applies here as well. Gone are days when the returns were assured by the insurance company. True retirement planning may be achieved more effectively and economically using other financial products.
Reason No.05 – I want to provide security for my children for their education
This is one of legitimate reason for which insurance is to be bought. However, the risk to be covered is not of the child but of the parents. So called children policies do not provide this option by default and the parent has to pay an additional premium to cover his/her risk.
Reason No.06 – My Bank asked to purchase insurance policy
This means it’s only due to the pressure exerted by bank (it could be other types of lenders also like housing finance companies, car finance companies etc to safeguard the loan) that one will buy insurance. Otherwise, he/she will not get the loan. In this situation, the purpose is fine but it’s not bought with the awareness of one’s total risk exposure. Again, it will be a double whammy if products like ULIP/Endowment/Money back are forced up on the borrower. On one hand he has to repay the EMI and on the other hand, he also need to pay hefty premium towards such ‘with profit’ insurance polices. There could be indirect coercion because of the business association between the lender and the insurance company. Many banks today have either become corporate agents of insurance companies.
Reason No.07 – My Uncle/Aunt recommended to buy insurance
This is one of the standard scenarios in many households, especially if your uncle/aunt is retired and/or has taken up selling insurance as second innings. It’s no secrete that insurance advisors, at least in their initial years, will be asked to target their ‘natural market’ meaning their own household members, relatives, friends etc. to sell the minimum number of policies to keep their licence alive. Here again insurance is bought for reasons other than the one it’s meant for.
Reason No.08 – My friends told me to buy insurance
Here’s another young person who has some awareness about insurance. But the purpose of insurance has not become very clear.
Reason No.09 – My parents told me to buy insurance
This is not surprising, given the fact that including people who graduate from the college have not much idea about the concept of insurance. So if one is not in to jobs, it’s very unlikely that he/she will have any idea of what insurance is other than the advertisements one sees in TV/Newspaper which again does not say much how insurance works. Even if parents tell their children to avail themselves insurance, it’s for reasons other than for what insurance is meant for.
Reason No.10 – I want to cover my life risk
I have come across very few people giving me this reason for buying a life insurance policy. Actually, this is the right reason for which insurance is to be bought. The very purpose life insurance products came into existence was to provide economic security to the dependents of the breadwinner in his/her absence.
If you are a young earner without any health problem a term insurance is the right kind of cover for you. It costs less and because of level premium, you will feel less and less burdened as time progresses and your earnings increase. The money saved (by not buying life insurance for any other reason) can be channelised to an investment plan.
