There are better options, other than insurance as an investment, for your later life R Balakrishnan
How much are we willing to pay, to provide for our family? What is it that we really want, if something fatal were to happen to us? How much of a role does money play in this? These are difficult to quantify, I guess. First, if something were to happen to me, whether money is needed or not depends on whether I have financial dependents. If I do not have anyone whose day-to-day living is materially impacted, there is no pressing need for me to leave behind a source of income. However, if I do have someone who is dependent, then I have to make sure that I provide for them. Calculating this is tough, since it involves future needs, aspirations, etc, of the surviving dependents. We all easily understand this as the need for a life cover or life insurance.
As we progress in life, normally, our aspirations tend to rise. Similarly, our income levels also tend to go up with time. At the same time, with each passing year, our need to provide a cushion for our dependents should decrease under normal circumstances (with more savings and commitments on children getting nearer to extinction). So, if we do well in life, we would reach a stage, hopefully, where our dependents are financially secure. For example, if one gets married at 30, has children in three to five years, by the time one is 55, one would have provided for most needs of the children. One may also have some savings/investments that take care of other needs. So, with age, given normal earning cycles, the need for life insurance should decline and, at some point, it should be zero.
The issue here then boils down to two key things:
i) I need a life cover up to some stage in life; ii) I need to accumulate wealth and leave behind as much wealth as I can.
Often, we tend to mix up these two goals. For example, we are willing to pay a fixed amount every year to cover the loss of our vehicles or to meet any major unforeseen medical expenses (hospitalisation, surgery, etc). We are even willing to pay an annual premium to insure our home and property.
However, when it comes to life insurance, we think very differently. In all cases other than life, we are willing to treat the amount spent on insurance as expenditure. We do not look for returns. We look at the value covered and the lowest possible outgo. Life insurance is no different. Why do we mix up investment in this? Why do we want something in return for the money spent as insurance premium? We get taken in when the seller of insurance tells us, “If you want a pure term policy, fine with me. However, if you want some money back, why do you not look at...?” One interesting product to buy for life insurance is a ‘return of money’ policy. In other words, a definite sum of money is paid to the nominee/legal heirs on the death of the insured. This can be a low-premium product, fixed cover, no participation, riders, etc. This is an interesting policy in today’s times.
Also, there are options other than insurance. It is very likely that as we grow old, we will be left to fend for ourselves. By choice, we may not want to impose on our children, leave aside the fact that we may be inconvenient for them. In such a case, perhaps the best option is a genuine reverse mortgage on the home we own and soon to become worthless as we near our expiry dates. A pure reverse mortgage would be one where the lender or the provider of the mortgage takes a fixed call, without recourse. He takes all the risk of the marketpricein future and gives you fixed amount as ‘interest’ on the real-estateasset every month. This is perfect because it makes sure that we consume our assets in our lifetime and do not leave a mess for our heirs. Central Bank of India, National Housing Bank and Star Union Dai-ichi Life Insurance Company(promoted by Bank of India) have launched such a product last year. There was a Moneylife Foundation seminar in Mumbai where the product was explained in detail. But the product is not being popularised because bankers have no incentives. There are cultural issues involved as well. In very few cases, would it be fine for parents to let the property go to the bank and also for the children to let go of the property. In any case, examine your specific situation and go for what is right for your condition.
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