“To save tax.” These three words sum up the reasons why Rajiv Kashyap pays a premium of Rs 1 lakh for the seven life insurance policies he has picked up in the past nine years. They are all random picks across the many types of life insurance policies : two money-back plans, two endowment policies and three Ulips that cover him for about Rs 18 lakh. That’s far too little for the sole breadwinner of a family that lives in a house bought on a loan. Why not to buy life insurance – We knew we needed to do a portfolio makeover of his personal finances.
When Kashyap approached us for financial planning, the first thing we looked at was his life insurance portfolio. A rough calculation showed that he needed a cover of at least Rs 90 lakh. We took into account the outstanding home loan of Rs 22 lakh and a car loan of Rs 2.5 lakh.
His wife, a homemaker, had no source of income so his entire income of Rs 75,000 a month had to be replaced. Then there was their three year old child whose future needs such as education and marriage had to be provided for.
Kashyap saw the calculation and his eyes almost popped out. “Where will I find the money to pay the premium for such a large cover? I am already finding it difficult to pay the Rs 1 lakh for my existing policies,” he grumbled. True, this IT professional has painted himself into a corner by buying high cost policies for the wrong reasons. He is paying more than 11% of his salary for insurance policies that will not even cover his outstanding loans.
Why not to buy life insurance – Junk the needless plans
We calmed him down and suggested why need not to buy life insurance and he should realign his insurance portfolio. The moneyback policies were not serving any meaningful purpose in his overall financial plan. Such plans are meant for people who are looking for a periodic payment to supplement their income or meet any planned expense in future. For instance, one may require money after five years for his child’s education and then again after five years for his marriage. Why did Kashyap need his money to come back to him when he already had a regular income and his goals were still far away? It was best to terminate such meaningless plans.
Next in the cross-hairs were the endowment plans. Since these policies had been running for some time (Kashyap bought them when he started working), it didn’t make any sense to surrender them now and lose the maturity benefits. We suggested that these be turned into paid-up policies. He could stop paying the premium. The insurance cover would reduce but not completely end. When the policy matured, he would get the remaining corpus plus the maturity benefits.
Why not to buy life insurance – If not taking sufficient cover
These two actions alone freed up a premium of roughly Rs 43,000. Kashyap was mighty pleased with the reduction in his burden but worried that his life cover would reduce to around Rs 14 lakh. We suggested that he buy a term insurance cover for Rs 76 lakh. At his age (32 years), a cover for 30 years would cost him roughly Rs 12,000 a year.
Kashyap was a little apprehensive. “What will be the maturity amount of this policy?” he asked. “There is no maturity amount. You will get nothing if you survive,” we told him. “You mean my premium will go waste?”
We could see that Kashyap was still in the insurance-cum-investment rut. The policy we had suggested would cover him for Rs 76 lakh and cost him just Rs 1,000 a month. Yet, he still wanted something back from the plan and considered it a “waste” if he didn’t. Insurance companies have designed plans just for people with this mindset. “There is another plan where the company will return the entire premium you pay at the end of the term,” we offered.
Kashyap’s face lit up as if he’s given the winning answer on Kaun Banega Crorepati. “That sounds great. I’ll take that plan,” he said. Little did he realize that the return of premium term plan will give him barely 4% returns. Anyway, we were glad that at least this would make him buy sufficient life insurance.
Why not to buy life insurance – If not keeping for long term
Then we turned to assess the Ulips in Kashyap’s portfolio. “Two of the plans are maturing this year so I can end them,” he said. Maturing? But he bought them only three years ago. “The agent told me that I needed to put money in for just 3 years and after that the money could be withdrawn,” he said. This sounded familiar. Almost eight out of 10 Ulip buyers are told the same thing and five of them actually believe it.We explained to Kashyap that Ulips have high charges and most of these are front loaded.
If he withdrew after three years, he would suffer only the pain of the initial years and forego the gain of the later years. He had already made the mistake of combining insurance with investment. By exiting early, he would only compound the error. One of the Ulips was a child plan with an inbuilt waiver of premium benefit. After we explained to him how the Ulips worked, Kashyap was convinced that he should continue with the policies for the long term.
Hope you like the above stories to elaborate – Why not to buy life insurance.
Names changed to protect identity.
Hello Mr. Radhey!!
Thnx for such an informative article. I am also a victim of such case. Need your suggestions.
Due to insufficient knowledge & just to save tax, I took “Future Sanjeevani UL-RP Policy” in 2009, with an annual premium of 15,000/-. My sum assured is ONLY Rs. 75,000/- with a policy premium term of 5 years & lock-in period of 3 years. Through customer care executives, i came to know that they have put all my money in Debt part, nothing in equity.
Now, As far as I can understand, I am wasting my money by this investment, which will never give me any returns in future. As debt money would not fetch any returns & whenever I will surrender the policy,they will deduct the allocation charges. This way, i may always get back the amount equals to “Total paid premium minus the allocation charges”, which will always be less than the invested premium amount. I really want to surrender this policy, but cannot do this before completion of lockin period or 3 anniversaries of the policy.
Pls suggest me what should be done in that case. When can i surrender my policy so as to get my premium amount back. (I hv paid 3 premiums till date, equals to Rs.45,000/-).
Expecting a reply..
Regards,
Aparna Nema.
@Aparna, Aparna, an answer taking into account your holistic financial position will be better than one which is based taking a stand alone view of this policy.
What is the current market value of the fund ? Why don’t you switch over to the equity fund now and keep investing if you possibly can.
If you think this 15k is a great amount of money for you and will come handy if freed up in a significant way, get out of it.
But your inference is right – never shoudl have bought it in the first place !!
@Radhey Sharma, I agree with you Radhey on this. The last line of your comment should be BOLD and underlined “…never should have bought it in the first place” – at least not without a good hard look at the policy details.
@Radhey Sharma,
Dear Mr. Radhey,
Thnx for yr reply..
As per the unit statement of my policy, the current fund value is Rs.40,287.74, & the allocation charges Rs.5175/-. (i.e. after paying a total premium of Rs.45,000/-, the total value of my units is Rs.40,287.74/-) what I blunder I had done 🙁
If I switch over to equity fund now, what should be the proportion of Debt:Equity?? Is this policy worth continuing for 5 years?? If I surrender this policy, what could be the possible hidden charges apart from allocation charges?? Kindly comment..
Regards,
Aparna.
@Aparna, You can get the proportion from the policy document. You need to read your policy documents with a comb ! Surrender charges and all can be found out from the insurance company. Get all the details first madam before you can take a decision.
You haven’t answered the other question of what will you do with this 15,000 once it is freed up.
@Radhey Sharma,
Dear Mr. RAdhey,
As adviced, I will surely go through the policy document & then will take any decision. If I decide to surrender this policy, I may think for an LIC policy, may be an endowment plan,with near about similar premium amount. But 1 thing is for sure, this time, before taking any decision, firstly i will try to get sufficient knowledge about insurance policies. Thanks for providing nice & informative articles on this website.
Regards,
Aparna.
@Aparna Nema, Madam, don;t got for any insurance policy without having done a holistic evaluation of your financial disposition.
Otherwise it will be a case of leaving one bad thing to end up with another.
You would be better off with mutual funds than insurance.
Radhey,
Thanks for sharing a real life example. But I was really surprised that your client ended up buying term plan where he got returns back on maturity. But did he notice he was paying more premium and the rate of returns was just 4%. You could not convince him.
Rakesh
@Rakesh, For some clients, this return of premium is better than having nothing. When one moves from a portfolio of junk insurance plans which were bought for investment, one faces this challenge of moving to pure term plans.
We convince clients to buy pure term plans but when they don’t and believe me that there are many clients that just do not go ahead and buy the plans, we advise this middle path approach.
@Radhey Sharma, Can you tell which plan is this that is giving a coverage of 76 lakhs and returning the premium with 4% returns? And how much is the premium?
Again this is an article I’d say publish it every now and then. The amount of people like Kashyap are just so many that the awareness has to be increased among the young generation.
I really enjoyed and liked the way you took a live case to explain why and how to look and revamp your insurance portfolio. I am also in the process of doing it and hope to complete it in next few months. That was my new year resolution. 🙂
@Vivek K, All the best !