Life Insurance: Protecting wisely

It is good to see a host of life insurance companies actually talking about the features of their insurance products. All these years, their high decibel, celebrity-starring advertisements were used to shove expensive investment products down the throat of gullible investors. They pushed insurance for children (an investment product with high commissions supposedly meant to create a corpus for education and/or marriage) even as the basic product of ‘life insurance’ or pure term policies were kept hidden. In all this, the Insurance Regulatory and Development Authority supported the industry since the beginning.

Aegon Religare Life Insurance let the cat out of the bag a few years ago by launching an online term plan at a very affordable price (by passing on agents’ commission)—a move we cheered. It is heartening to see this product now being pushed actively by companies like ICICI Prudential Life, HDFC Life and Bharti Axa Life. A term plan is perhaps the only life insurance policy that a normal person needs. This is a pure cover that pays out a known sum of money to the dependents in the event of the insured passing away before fulfilling financial obligations. To get this comfort, one pays an annual cost. However, even when you ask the agent about such a policy, he typically dissuades you by saying “But sir, you do not get anything back; why don’t you look at something else.”

Unfortunately, even the so-called savvy customers want ‘something back’ at the end of the policy term; so even the better quality of agents and advisors cannot sell pure term plans easily.

Pure term policies can be improved. Some companies offer cover only for 30 years. This is fine in a normal situation but if one has additional dependents, for some reason even a later stage, it would mean discontinuing the old one and taking a new one at a higher cost. Ideally, one would like a policy which covers you until death and offers a guaranteed payout only on death. This is ideal for estate planning. In one of my very early articles (Moneylife, 1 February 2007), I had written about such policies being ‘tradable’. This means that if I have such a life policy, I can actually sell it off to an investor at any stage, at a negotiated price. The investor would have to take a call on my likely longevity, estimate a return on his money for the period the money is locked in (till he gets the final payout on my demise) and arrive at a price to pay now. Such an instrument would be great. I would be able to sell this policy at a stage in life where I can provide for myself to battle inflation and a few uncertainties in life. If I am single and, thanks to modern medicine, live beyond my useful life—after my income stream has dried up—such a policy can come to my rescue.

This kind of a ‘tradable life policy’ (TLP) is common in many parts of the world and meets a genuine need. It also provides a Triple-A-rated investment opportunity (the only difference being that the time of payout is uncertain) for those who do not mind the morbidity associated with this investment. (An investor would have to hope for early death of policyholders to make money). This factor apart, tradability provides an essential and useful feature to the insured, helping them to face the uncertainties of prolonged existence and without depending on a third party. I hope IRDA will bring this about and the ministry of finance will encourage it by enabling favourable tax treatment.

Life insurance is a serious business—it’s the only way you can get protection from unforeseen events. Today, it is seen only as an investment vehicle. Let us not mix it with investments. IRDA can help by guiding the insurance companies to sell pure life policies and encourage innovations like TLP, if it wants to promote what is in the public’s interest.
 

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