Why people dont like Term Insurance and why they are wrong

We have no desire to make anybody look like a blithering idiot, but we do love it when they do. — Stephen Colbert . One of the reasons why most people do not take Term Insurance is because “They don’t get anything back at the end”. In this article, I will show you why this is a psychological issue. Even if you get your money back at the end of the tenure it won’t make much difference. In this article I will prove that the argument “Term Insurance is waste of money because you don’t get anything back” is amazingly idiotic.

What is the main Issue with People not liking Term Insurance

Why people don’t like Term Insurance is the question. The answer is simple: because you don’t get anything if you survive the whole tenure and hence the amount paid as premium is wasted – this is claimed by millions. Fair enough! The first thing is, these people do not understand or appreciate the Importance of Life Insurance. Now let’s see this situation from a different angle. Assume you get the money at the end in your Term Insurance. Let’s see a case study of a general Family. How does a family look like:

Manish is 28 yrs old and got recently married (oops!!). He earns close to 40,000 per month. His monthly expenses is around Rs 25,000 overall and he saves 15,000 per month (hehe). He also have his parents as financially dependent on him. He is 30 yrs away from his retirement. He calculated his Insurance Requirement and it was close to 50-60 lacs minimum. Let’s take it as 50 lacs for simplicity for now. Get more of Insurance Articles from Archives section.

Analysis of Case Study

Now is the fun part: his current monthly Expenses are close to 25k. Now what will it be when he retires after 30 yrs? So the average inflation for last 30 yrs was 6.5% (based on past data). Let’s assume it will be 6.5% for next 30 yrs on an average. Then the monthly expenses after 30 yrs would be 25,000 X (1.065)^30 = 1,65,359 (1.65 lacs). If he takes a Term Insurance at the start, his yearly premium per year for 50 lacs cover would be Rs 11802 for 30 yrs tenure from Aegon Religare. Do you know how you can do your Retirement Planning in 6 steps ?

Click to Enlarge

Which means, he is going to pay total premium of 3.54 lacs in his entire life. How even if he gets this money back at the end, how much will it benefit him? How many months can he survive on this money? 2 months is the answer!! With expenses of 1.65 lacs per month, the money he gets back from term insurance is enough for not more than 2 months. Let’s take maximum 3 months. That’s it!!! Are you confused with Calculations, See this Video presentation by me where I explain how to do important Calculations in Personal Finance.

So Following are the questions needed to be asked

  • Do you want to put your Family at Financial Risk because you are not getting 2 months worth of expenses back?
  • For a small amount you “don’t get” at the end are you not being childish to Secure your family?
  • Don’t you think you are seeing Term Insurance from a wrong attitude?
  • Are you not concentrating on “what you are not getting” rather than “what you are getting”?

We already have “Return of Premium Term Policies”, but they are themselves idiotic because they are again designed to just exploit the weakness of people who feel that term insurance is waste of money because they don’t get their money back. Read this to understand why Plain Term Insurance is better than “Return of Premium Term Insurance policy”.

Reason why Indians dont like Term Insurance

Reason 1#: Most of the people concentrate on number and explicit data, like the money they are not getting back or its a waste of premium if nothing happens to them. They fail to look internal advantage which term Insurance provides.

Reason 2#: We are emotional with Money, we are more concentrated with Growing money and getting money back rather than what value it provides in our life.

Reason 3#: Most of the people think that the probability of dying is much lower than an average person which is again totally idiotic. We just don’t want to visualize a bad situation and hence do not concentrate on that situation.

Conclusion

In life we don’t appreciate things like Health, small moments of happiness, nature, time spent with our loved ones which are most wonderful and real things in life. Term Insurance is one of the similar things in personal finance domain. You just need to shift your focus of view from “what you are losing” to “what you are getting” once you do this with Term Insurance and your Life, both will become wonderful.

Please comment on what do you think about this and do you agree with it. Are you victim of such mindset?

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242 CommentsAdd Comment

  1. kartikyn

    Hi Manish, Dhawal and all other experts,

    need some advice please

    I am an NRI male 34 years, non-smoker and non drinker. BMI less than 25. Only problem is my HDL cholesterol never crosses 28 (overall chol is less than 170, LDL < 110 and i have no triglycerides issues either). No sugar problem too.

    I have no debts and some reasonable savings in MFs, Equity, PPF and NRE FD deposits besides bullion.

    Three Questions, (insurance limit of 3 crores arrived at after taking future inflation and needs into account)

    1. I have appeared for medicals for 2 crore Amulya Jeevan II. TMT, echo etc are ok. The premium is nearly 64000 pa (no loading as of now). While the application is nearly made, (still can stop it),
    I wonder why LIC is 2.8x costlier than an ICICI iprotect at 22,875 for a similar policy. I understand the use of older mortality tables by LIC and also understand there is no big difference in payment claims b/w players.

    Need advice if it is worth the pain to go to specifically Kotak, Aviva or HDFC or ICICI for alternative as it seems savings in excess of 30000 an year can be invested in an equity MF for much better returns (roughly 5-6% real returns post inflation adjusted)

    2. I am also in the process of taking an permanent disability/accident death rider from future generali for 1 crore and premiums are around 16000 pa. Rates seems similar across other firms and my agent was quite honest. Do I need to do additional homework here?

    3. I have a bunch of Jeevan Rekha and 3 other money back/endowment policies that my agent in Mumbai deceived me into buying when i was 24. I have paid premiums for 10 years now but think it goes against my idea of mixing investments and insurance… Am i better off surrendering them as I have to pay premia till 2034 and they are not cheap (22,000 premium for 8 lac cover in total plus some money back and bonus later)

    Should I surrender these policies and invest that 22,000 instead in an equity MF or in equities. Would appreciate some advice.

    Many Thanks
    Kartik

    • 1. Better take a pvt life insurance, its the same thing truely speaking . Dont get over obsessed with LIC on this and waste the extra 30k

      2. I think you can just go ahead in that

      3. SUrrender them now ~

      Manish

  2. Chetan

    I am 39 years old. What is the ideal tenure for online term plan.? If it is LIC online plan. should it be different if it is from HDFC ..?

    regrds /ck

  3. Vivek

    Hi Manish,

    First, I would like to thank you for writing so many informative articles that provide insight into Financial world to people like me and so many others like me.

    Now coming to the point, in this article, you haven’t considered the interest, in your calcutaion of 3.54L, a person will get when he/she does the RD of the premium which is as per your example 11,802 for 30 years. If the person does the recurring deposit for 11,802/- every year till 30 years, he/she will get 13.36L (considering 8% interest rate).

    And you can consider 3.54L to be negligible when compared to 50L, but we can’t ignore Rs. 13.36L.

    I am not questioning the benefits of term insurance, but with the new figures of 13.36L definitely I have now become equally inclined to both “term insurance” and “Insurance with high premium but with returns”. And couldn’t decide which one should I go for.

    Please help me decide which is a good option.

    Best Wishes,
    Vivek

  4. Ramu

    Hi Manish,

    I am 25 years old and would probably get married next year. I’d like to know about the Term insurance. I can pay a premium of 10k per annum and would like to know clearly if i have to pay the premium for about 10 years and the maturity period is 30 years. My questions are…
    1.After the maturity period if I am still alive, will I get any money??? when I will get money if I am alive??
    2.If i died after the maturity period, what my dependents will get?
    3.If I died before the maturity period,, what my dependents will get???
    4.Do this Term insurance covers death due to health problems, accidents???

    Please do reply me

    Regards,
    Ramu.

  5. Rahul

    Dear manish, good day…have a query for long but unable to find a satisfactory answer..want to have a term insurance plan…LIC having the highest % of claim settlement and with a contact/agent to talk to my parents in case of death unlike other online plans…
    the problem is i am in merchant navy…i dont pay tax as i earn in dollars and enjoy benefits of NRI…are these term plans allowed for NRIs or not…insurance companies esp religare mailed that yes they do for merchant navy but i still doubt it that claim settlement may be an issue then and can be denied on the grounds of me being NRI…
    havent got satisfactory answer yet from anywhere…what shall i do…

      • Rahul

        Thank you Manish, neways i spend around 3-4 months in a year at my hometown in India and this is where ambiguity comes as spending 3-4 months in India has created confusions in most of the insurance advisers/customer care executives.
        Thanks again.

  6. Gayathri Iyer

    Hi Manish… Have been following jagoinvestor big time..
    In the last few months, have closed 3 money back policies, 1 jeevan saral policy and 2 endowment policies held by me / my husband.. thanks to the learnings from this site…!

    We have also gone for a term insurance with LIC last year… The problem now I face is – for a life cover of 45lacs, the annual premium comes to around 18K.. which seems to be way too high, considering the recent rush in online term plans which give a the similar cover for very low prices… (even a company as good as hdfc gives 1 cr cover for around 13K)… Sadly, I missed your articles on cheap online term plans / the drop in premium for over 50L coverage.. :(

    My query is – would it be wise to close term policy with LIC (only the 1 premium is paid do far).. and go with other cheaper options..?

    If yes, are there any specific disclosures about this closed LIC term policy to be made before buying the new term policy…?

    • Yes , better go with private insurers .

      You can close the LIC term plan , but when you apply for private , they will ask you if you have any other term plan running, and there you need to mention about LIC term plan , but do not get scared, mentioning it would not change anything .

  7. Mahesh

    Hello Manish,

    There are certain Money back policies which also return money periodically (for e.g. every 5 years). So even in this case is the above calculations valid?

    Best regards,
    Mahesh.

  8. Gayathri Jagdish

    Hi,

    I have a 1 year old daughter I am planning to buy a insurance policy for her….
    would u plz suggest me some good plans… waiting for ur reply…Thanks in advance

  9. Pratik

    Hi Manish,
    There are certain exclusions in term insurance like if a person has committed suicide than his claim will be rejected. But what about murder? If a person is murdered than will his family get the claim money or will it be rejected?

      • Pratik

        Thanx Manish for solving the query.
        Just out of curiosity: in the above case ‘how did the insurance company came to know that the murder was planned by the person dying itself ? Do they rely on police investigation or do they have their own investigators who carry out the process ?

  10. Pratik

    After reading the article & comments i explained the benefits of term insurance to my colleagues…but they simply wont listen….That’s why i realized why you mentioned that this is “psychological issue”!!Amazing analysis
    atleast i got wiser :)

    • Pratik

      let me suggest you something. Gift them my book which is at flipkart , bear the cost yourself for atleast 1-2 people you care about , and tell them, if after reading the book, you feel it helped you and it was worth , return back my money , else consider it as a gift. I should 99% work in your favour :)

  11. Hi Manish,
    I have a few Questions and it would be great if someone can think about these scenerios as well.

    Consider that I have a Term Insurance of Rs.7000 per year and the Sum Assured is 50lacks.
    Now, First Year I pay Rs.7000; Second Year Rs.7000 and so on for 10 years. So Total Amount I paid would be is Rs.70,000. I have no luck to die and still my Sum Assured is 50lacks.
    I am sure after 10 years, things gets change and new policies come which can be cheaper say Rs.7000 and the Sum Assured is 1 crore.
    So, I will cancel my Old Plan(Rs.70,000 is gone) and change to my new Plan(Rs.7000 with Sum Assured for 1 crore).

    My Question or what I am trying to ask is
    1. I would like to know or someone can predict if term insurance will get cheaper or costlier in the coming years. – If it gets cheaper then people will be cancelling their old plans! :)

    2. Another Idea is considering Term Insurance as Yearly Scheme. Then I pay Rs.7000 and my Life Cover is 50lac. If I escape the year; then I lose Rs.7000. Likewise, each year as my requirement changes I can change my plans.

    With Term Insurance I think we can cancel(or even abscond without paying) any time(Since we are anyway losing our money) and buy a new policy which is better at that point of time.
    Correct me if I am wrong and if its better we chose a Term Insurance which increase 5% per after 5 years like that to avoid these confusions?

    Sorry for my Long Post. This would be great if someone can understand what I am trying to say.

    Thanks
    Suresh

    • Dear Suresh,
      While doing some research on Insurance, I stumbled upon your query. Hopefully, you would have already got your answer by now (it’s now 5 months) but in case you haven’t, please consider the following:

      Future Rates:
      Most Indian Insurance companies are relying on old LIC data to estimate risk of mortality and fix their premiums accordingly. As this data gets updated and refined, they will be able to differentiate and offer cheaper term cover rates to low risk customers.
      However, as your age increases, the cost of insurance will creep up.
      So it will depend on your age, profile, geographical location as well as the quality of data and competition among the insurance companies. If you get a better deal from an insurer with a good claim settlement ratio, take it.
      However, make sure there is no time lag between the 2, leaving you exposed to risk.

      Additional requirements:
      You also have the option to buy additional policies for shorter duration as and when the need arises. viz. while you have incurred a liability like student/car/home/personal loan or business liability. Once the liability is paid off, you can discontinue the the additional policy and save the premium cost.

      Of course, insurance planning, like all financial planning is a dynamic exercise and you must review your requirements at least once in every 2 years or when there is a major change in your situation.

      Hope this helps.

  12. Rajendran

    You have completely changed my views that i had on Insurance. Thanks for opening the eyes. I have no luck with insurances as i was forced to choose the polices by cunning advisers because i had no idea about insurance or finance planning.
    In 2006 I bought RIM Endowment and dropped it without paying premiums after 1.3 yrs ( lost around 22 K). After that i was brainwashed by a friend come adviser to buy Max New York – Whole Life Participation Policy for 10 L sum assured with all riders. By that time i was forced to choose some policy for tax planning purpose since i had no idea about tax planning too. Now i have completed 3 yrs and the policy is in live state (next due : nov 2012) but after reading your blogs i feel ashamed to have a policy like Whole Life (21K P/A premium) participation which will never either be helpful for me. I have a small plan running around my mind but this time i don’t want to take decision with out asking an expert.

    Now I plan to drop my existing MaxNewYork Whole life Plan ( till now i have paid around 64K, i guess i will at least get 37200 (60% of premium paid) back after closing it. And i have decided to go with 2 Term insurance polices for 25 L + 25 L ( one can be dropped after my retirement or some time later) which will not cost more than 8 K P/A. The remaining 14K + additional amount can be invested in Long term mutual funds. Personally i have 2 medical insurances so i don’t bother about it now.

    Please correct me if am wrong.

    • Yea whatever you plan seems to be a much better option that your last plan :) . Just go ahead and try to learn more about all this in coming times .

      One more thing . Stop saying that you were forced to buy things . No one can do it , you didnt question things and took the decision, you need to take the responsibility .

      • Rajendran

        Apparently I agree with you, i took wrong decisions without analyzing products by asking more questions.
        Thank you very much for your comments on my doubt. Based on your comments, I spoke with 2 insurance companies reg term plan and as a result i have decided to buy AEGON REligare with all riders + 30 yrs = 25 L and AVIVA for 25 L + accident rider for 25 L. I guess will safeguard my family incase of my absence. Hereafter, i have to think carefully and follow the experts suggestions to make returns out of my investment either in mutual funds or from insurance.

        Thanks once again for bringing the light in to my life.

  13. deepali

    Hi manish,

    Hope u r doing good…!!!

    im working and have 1 plan of reliance(money back) from last 3 yrs. Now planing to take 1 more plan from investment point of view.

    my hubby n me , both are working and planning to save at least 2 lac per year for our future.

    Is saving in post office relevant…!!

    Can you tell me which plan suits us.??

    Regards

  14. Vinod

    Hi Manish,
    i zeroed the term plan for 50 lacs with Accidental rider with disability.
    i inquired with HDFC, kotak but they don’t have Term plan with disability riders.
    your suggestion please.
    if i go 25lac term and other 25 lac term plan with accidental Disability rider.will this benefit?

    vinod

  15. Vinod

    Thanks Manish,

    how will i go with options available,
    there are online and offline plans,
    is there any difference with it?
    will be any hassles to claim online plans?
    should i go with riders will that benefit?
    Vinod

  16. Vinod

    Hi Manish,
    i”m 36 yrs married ,looking to insure policy myself which will protect my family .
    i have searched lot of articles and blogs but even i can not zeroed out any plan or cos.
    simply 50 lacs cover.what would you suggest?term plan or endowment or else?

    Vinod

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