Jagoinvestor

August 3, 2009

Why people don’t buy Term Insurance?- Analysis of a case study on Indian people’s mindset

“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.

term insurance

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 are around Rs.25,000 overall and he saves 15,000 per month (hehe). He also has 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 on image 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”.

Watch this video to learn why Term insurance is better than regular insurance policies:

Reason why Indians don’t like Term Insurance’

Reason 1#: Most of the people concentrate on number and explicit data, like the money they are not getting back or it’s 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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JayPatel
JayPatel
8 years ago

Hi Manish,
I am 25 years old single and earning 35000 per month. As of now my parents are not dependent of me.
As of now I don’t have life cover except my employer provided which cover is around 40 lacs.
Which insurance i should opt in? Money back term plan i think as an option.

KIran
KIran
8 years ago

hi Manish,

I have left job recently in Dec 2015 & my wife is home maker. we get some rental income & interest on FD in cash, so no income proof in written, HDFC said they cannot open Term insurance for my wife as she has no income, is there any other company which offers term insu for house wife, please advise.

SaurabhNandgaonkar
SaurabhNandgaonkar
8 years ago

Hi Manish,

I just need to know how company affords to pay this huge sum in case of death of the insured?
These all are private corporations and not some charitable institutions.
Also, I would like to know if in the history of insurance has any nominee been lucky so far in getting this amount?
It’s a hard earned money and without knowledge if term plan really pays off why would anybody, including Indians, pay for this?

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Bloggerati of the Fortnight: Manish Chauhan | Indian Social Media Landscape
8 years ago

[…] Why people don’t take Term Insurance and why they are wrong ? […]

Ayushi
Ayushi
8 years ago

Can I change/add nominees later as my dependents change?

Murali
Murali
8 years ago

Dear Manish,

I recently came across your blogs and find many things truly interesting. I started really knowing too new concepts like Term Insurance. I would really care for my family. Please suggest on today’s date which is the best TERM INSURANCE we could invest in with a possible lesser premium yearly. Looking at today’s inflation, I feel we family should be covered atleast between 50lacs-2cr after my absence. Please suggest best ones/one.

Thank you so much,
Murali.

vignesh
vignesh
8 years ago

Hi Manish

Actually i got a term two years before and now am 25. if i check the new policy for my age with the same insurer and same tenure it comes 1k diff.

can i stop the old one and take a new one?

Pls guide me

Arpan
Arpan
8 years ago

Hi Manish,

I have a doubt regarding premium across the tenure.

Let say, I buy a term insurance of 1 Cr at the age of 25 for a cover of 30 years, for which premium come nearly around 8.5k approximately. Will this premium be increasing as and when the the age of policy buyer increases ?

Thanks

Dipesh
Dipesh
8 years ago

Hi Manish,

I am 23 years old, and I am planning to get Term Plan.
I am seeing 8400 rs. yearly premium for 70 lacs death coverage from Aegon Religar, even I am a smoker. Please suggest, can I go ahead with this or should I look for others?
Awaiting for your response!
Thank you!
Regards
Dipesh

kartikyn
kartikyn
9 years ago

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

Krushna
Krushna
Reply to  kartikyn
8 years ago

Manish,

Its all the mind game private sectors play with customers by offering less premium. If you see the mortality ration . LIC offers affordable premium. so they can pay all the claims within the premium amount they collect from others.
that’s why private sectors has maximum rejection ration in such cases.

Chetan
Chetan
9 years ago

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

Vivek
Vivek
9 years ago

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

Ramu
Ramu
9 years ago

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.

Rahul
Rahul
10 years ago

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
Rahul
Reply to  Jagoinvestor
10 years ago

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.

Umesh Patel
Umesh Patel
11 years ago

Great Job Dude.
Thanks a lot.

Umesh Patel
Umesh Patel
11 years ago

Great Jo Dude.
Thanks a lot.

Gayathri Iyer
Gayathri Iyer
11 years ago

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…?

Gayathri Iyer
Gayathri Iyer
Reply to  Jagoinvestor
11 years ago

Thanks..!

Mahesh
Mahesh
11 years ago

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.

Gayathri Jagdish
Gayathri Jagdish
11 years ago

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

Pratik
Pratik
11 years ago

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
Pratik
Reply to  Jagoinvestor
11 years ago

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 ?