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POSTED BY ON April 15, 2012 1:09 am COMMENTS (13)
I am 22 years old and just started earning.My monthly take home is around 35000.I wanted to know what is the need of a Life Insurance.I am asking this because I didn’t understand the rationale behind taking a life insurance at all at any stage in life.
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Mohnish,
You are now 22 years old with no dependents. Let us assume that you get married at say age of 27-28 years. So now there is one dependent. Let us assume you buy a house worth 75 lakhs after getting married, by taking a 60 lakhs loan. Now you have dependent and liability. In this situation you can imagine two scenarios:
1. Nothing happens to you till you retire.
2. You have a accidental death like car accident, railway or air accident (God Forbid!).
In first case, whether you take insurance or not does not matter. In second case, your wife and children will be in financial distress. The house will be taken away and unless your wife is also working, your family will have difficulty to raise money for daily sustainance, children’s education, marriages etc. Please remember that you may not be able to save enough till that time to avoid hardships to your family, especially if scenario 2 happens early in your life.
So for a small amount of money (read term insurance) if you are able to mitigate the consequences of scenario-2, why not? Unless you are absolutely sure that it will never happen. Can anybody give this guarantee in today’s world?
Regarding type of insurance (term vs endowment vs ULIP), enough has already been said, so I will skip it. The bottomline is term insurance is a least cost option to mitigate the risks of unpredictable events beyond your control.
Philosphically speaking we are playing a game with death every day and night and when we wake up the next morning we think we have won. The interesting thing is Death comes back the next morning to play the game except that when Death wins we never come back to play the next day! Enough said already, I think!
There is a story of Person A and Person B taking Endowment Plans versus Term Plan+PPF+MF that we all saw few days back. Lets add a Person C to the story. Given that Person A with Endowment Plan loses the contest anyways the final confrontation is between Person B and Person C.
Person B has a Term Plan for 1 Crore with annual premium 9000. He also invests 16k in MF each year (For simplicity this is annual payment)
Person C invests INR 25,000 each year in MF (annual)
Scenario 1:
Both die after 5 years
Person B corpus: 1 Crore + 1.13 lacs
Person C corpus: 1.77 lacs
Scenario 2:
Both die after 10 years
Person B corpus: 1 Crore + 3.14 lacs
Person C corpus: 4.91 lacs
Scenario 3:
Both die after 20 years
Person B corpus: 1 Crore + 12.9 lacs
Person C corpus: 20.17 lacs
Scenario 4:
Both die after 29 years 11 months 25 days (5 days before the policy lapses)
Person B corpus: 1 Crore + 43.2 lacs
Person C corpus: 67.5 lacs
Scenario 5:
Both die after 30 years
Person B corpus: 43.2 lacs
Person C corpus: 67.5 lacs
However by the time scenario 5 happens Person B has in all probability met all financial goals for life so his lower MF corpus has no real impact on the dependents at all. However in the scenario that these guys are dead before the policy completion term Person C is worse off at every single point when money is needed the most.
Person D wrote a large poster that read: “Person C beat Person B in MF corpus throughout their lives. But the combined corpus of Person B beat Person C for almost 11000 nights (30 years) assuming these guys died at any point in that time period. Just when the Term policy lapsed both died and Person C came ahead for the first time in life ever. But the corpus is arriving in so late there is very less use at that point. Can you all READ THIS CLEARLY?”.
[Last heard, Person C is asking for a second chance in life to cut his mistakes. Too late, sorry!]
Very good story. Brilliantly told. Keep them coming, thick and fast!
Thanks.
Ramesh
Wow! Your first and last para says it all. Brilliant.
Dear Justgrowmymoney, that was one brilliant piece of wisdom. Please keep posting such gems.
Thanks
Ashal
@bharat shah : what i understand by term policy us that if you don’t die within the term period you’ll lose the entire money,which i think I don’t need at all at this stage of my life.
@ashal jauhari : obviously i’ll keep it in bank locker,but only if gold gives me a higher return than other asset classes.If it doesn’t i’ll not at all have gold.
@TheZion View : the probablity of people dying in their 20-40’s is very low.How many young people would have invested huge amounts in life insurance and as a result have lost out huge sums of money when the insurance term expires.
If i invest the same policy premium in some other asset like equity(or) gold (or) equity mutual fund SIPs,which traditionally give better returns for the term period.If something happens to me,my family can take the money out from these riskier asset classes and transfer it to bank FD,to get safe and sure returns from the corpus,which would be very high when compared to the return from life insurance.Yes the risk of the markets do prevail,but for a term of 20-25 years, the same premium if invested in top quality companies,would become huge and then the same family does have to worry at all as they’ll get that amount.
This is how companies like LIC are run.Young People fear their life and buy their products and spend huge parts of their incomes in these products and the company manages the money wisely and gets the difference amount which if after the term is larger than the premium itself.
Dear Mohnish, That 1 Kg Gold is your life & that locker rent of 1K Rs. yly is the prem. you are paying to cover your risk – loss of gold if you keep it at home.
Simple? Isn’t it?
by the way, I did not say you should purchase cover right now. But the moment, there are financial liabilities attached to your life & you are running a family life you should purchase one. Now a days 1 Crrore Sum assured is available as cheap as 8-10K yly for the person in his 20s.
Thanks
Ashal
Dear Mohnish, If you do have 1Kg gold with you, ‘ll you keep it safely in a bank locker or ‘ll keep it at home? Please answer this simple question.
Thanks
Ashal
@Mohnish Khiani If you are so sure of the certainty of your life and will put your future family at risk with that,,good luck to your family.
Life Insurance is a pure risk cover which will be means of income if something happens to ME during my earning period. I might die tomorrow due to a accident and my family will have to depend on other for their life , so i have insurance in place.
Life insurance is totally a personnel decision for everyone.
please add in start of 5th line of my reply as under:
‘plus investment ..’..
I am 22 years and no one is dependent on me and also it is very unlikely that i die in the next say 20-25 years.I went through a few policies of LIC and learnt that at the end of the 20-25 year term the return on money that i get back is lesser than the return on FD’s now.If i invest the same policy premium amount through SIPs into a few equity mutual funds for the same duration of the insurance term,the return differences would be huge.This is why I was confused as whether why I should ever go for a life insurance itself.
If my concept is wrong please correct me.
if you have no dependent and you are sure that you will not die , there is no need of life insurance! if you go through the discussion for life insurance policies ,you will understand that what you are mentioning, are traditional endowment insurance policies and ulip policies, which are not pure life risk protection policies , but they are life risk protection policies , and they should be avoided , as they are giving return less (in range of upto 6-7%maximum, as you said. but one in need of life risk protection should choose pure life risk covering insurance policies , which are called( pure) term life insurance. in term life insurance , you have to pay premium for the sum insured and the period of insurance, which would not return to you in case you outlived the period of insurance, but your nominee would get the sum insured in case of your earlier death.. the premium to be paid is expense for insurance of your life, and it is worth than the traditional life insurance policies. the premium for term insurance policies by different insurance companies are also different and even of the same company , the premiums of its online and offline term insurance are differing . better you go through this blogs’ articles and forum discussions on the subject, you will understand clearly on the subject.
rationale for life insurance is to take of your dependents, if any, in case of your death during your earning period of life. one should be insured at least for his standing liabilities, if any, plus the corpus required to give income for his dependents’ expenses for the period , as he would take care if he would alive , in case of his death.