Demystifying “Return” on life insurance
The returns on a Life insurance policy often seem to be a very confusing concept. This is true not just to a policyholder, but also to all other stakeholders i.e. intermediary, life insurer, and sometimes even to the shareholders. More often than not, the industry as a whole and all these stakeholders insist that the returns on a life insurance policy are low. The returns from a traditional savings product range between 3 – 5% and they are on the lower side when compared to any other savings instrument.
But while comparing these returns with other savings instruments, people tend to forget two basic factors. The first and most important factor is that a life insurance product ensures protection of loved ones in unforeseen eventualities and not originally designed as a savings product. One primarily pays for the insurance cover in a life insurance plan. The cost of life insurance goes up as people get older as the probability of death increases with age and hence the cost of insurance cover also rises. When the reality on this cost of insurance is ignored by policyholders, it leads to huge mis-selling. Since policyholders are looking only at returns from an insurance policy, some intermediaries mislead them by indicating very high returns. Surprisingly, sometimes the return promised is higher than any other savings vehicle! For example, “your money will double in three years”. Contrary to common practice of getting carried away by the promise of lucrative return, one should always apply his or her mind and stop believing in such commitments blindly.
To reiterate, life insurance equips one to face the uncertainties of life and protects against the financial losses resulting from death. The insurer promises to pay one’s beneficiary a specific amount of money when a person dies in exchange for timely payment of premiums. And, savings is another aspect of life insurance which helps one meet financial goals in life.
The other important factor is commission to the intermediary. One pays commission for the financial advice he or she receives. But Indians generally don’t like this idea of paying for advice. We need to realise that insurance is a complicated product and hence you need advice. If you are really an informed customer and don’t need advice, you may want to buy online policies. There are some practices in the market to share the commission with the policyholder. Sometimes, 100% of the commission is shared.
Therefore, prospective policyholders should come out of these confusions. You are paying for the cost of insurance and hence you need to exclude this cost from the calculation while calculating returns on your insurance policy. The returns then will be comparable to any other stable investment vehicle. If you really don’t want to invest your savings in an insurance policy and if you only want insurance protection, you should buy a pure term insurance policy. And most importantly, it is not advisable to ask for a share of commission of the intermediary – you can’t then expect sound, unbiased advice.
The decision to purchase a life insurance product cannot be based only on the returns. There are other features of the product that should be highlighted. For example, death benefit, guarantees, any other benefits like additional accidental cover etc.
Authored by Saisrinivas Dhulipala,Appointed Actuary, Bajaj Allianz Life Insurance