POSTED BY December 20, 2010 11:41 am COMMENTS (8)ON
If you are going to buy term insurance . What all details would you look at before buying
3. claim settlement ratio of company
4. max age upto which you can get insurance
5.The max tenure you can take it for
What other info one should look at . Your views ?
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8 replies on this article “What all details will you look before buying term insurance ?”
I just read coversation between you and Ramesh regarding FMC charges. Now, I really think that I need your “typed and saved a long reply”.
Wow, I didnt expect that one…(obviously, in a good sense)
—“What is insurance?”
An insurance as a part of my financial plan is a mere “Hedge” against me as an earning entity for my family.
When I say hedge, I dont mean that it should be able to cover all expenses as I ‘d have,had I been alive and earning.
My definition of hedge is partly covering up for possible losses and not entire loss.
—“How much cover multiplier a person should choose at various ages, you think?”
My perspective towards cover multipler at any age, is the total liabilities at that age.
—“What was your income when you started earning and is it today? And how much that income will be say 3,7, and 10 yrs down the line, you think? How much income level you will reach by your retirement, can you guess, any idea?”
No Guess, not even a wild one would work. When I started earning, and where I m today has seen a huge difference.
However, my insurance need isnt governed by my earning, it is governed by my liabilities.
As per understanding, my insurance need ‘d have been same at the time I started earning and today. Again, I m unmarried, no liability. For some reason, I assume that this need ll stay as is until I m married.
—“How will the law of averages or the possibility of any event happening with a single individual is to be perceived as compared to a large group of individuals considered as a single entity ?”
Yes, I m a great fan of possiblities. We know mathematically, tossing a coin has 50-50 possibility. However, it is certainly possible that if I toss a coin 10 times, and I still get “HEADS” on all counts.(Although, thats a rare one.. 🙂 )
And that’s what analytics at insurance companies do, they work out possiblities. And chart out “most possible events” and prepare a cost model to it.
That’s why I think, insurance is a hedge for me to cover up for most necessary expenses of my earning life. I dont intend to cover up each and every expense that I ll incure during the course of my life.
—“What do we do with the wealth we accumulate? Can we take it with us? Can we consume it or dare to consume it completely?”
This question points me to point think west(US culture). 30yrs hence, I dont expect thence generation to live with family just like mostly people there dont live with their parents. Therefore, my prime focus for post-retirement is to build wealth to feed me and my wife and not my kids. Clear and simple.
I dont want to look upto my kids for buying a candy,toys etc to my grandson. They(my kids) want money, let them earn it. period.
—“How is this wealth creation going to be impacted with two extreme scenarios of 1) ‘zero’ insurance 2) ‘maximum’ possible insurance cover allowed technically”
Maybe I didnt understand this question.
—“Do Mukesh Ambanis, Laxmi Mittals of this world need insurance? or do they need no insurance or should not buy it? Is this insurance thing for the not so rich or middleclass individuals?”
Now, that’s a very good question. Although, I ll not be able to answer the first part of the question, I think I know the second part.
Yes, insurance as a product has a target audience-i.e. middleclass(the mass, the feared, the self-doubting)
I doubt Bill Gates, Ambanis, Mittals..they need insurance…their company’s do. I hope you see my point here..If tomorrow Ambani dies, he doesnt have to worry about his daughter’s marriage, studies, his wife’s expenses, post him. But yes, their company’s do, as they are the decision makers who brought them to such heights, and if they are not there, their companies future, would have question.
—Last questions in the parenthesis—
By the Book, idealist society, pay the deserving, why reebok shoe costs 5000, than same lancer shoe which costs 900.
We all have these questions. Not everything can be in an ideal way. This difference is propelling the society, followed by growth, followed by ambitious you and me.
Yes, that govt org is the big daddy and has gained trust over years and that’s why commanding a higher premium charge(cashing Intellectual property), that’s why reebok shoe costs 5000, than same lancer shoe which costs 900.
New players ll always add to competition, but they need to prove, build intellectual property, brand, trust..to gain business. Agreed, this strive does brings loopholes, hook-crook methods, cheats…now, its upto us if we want to pay for the trust, or the lure of attractive, cheaper but less effective.
Looking forward to your big reply.
I have typed and saved a long reply to your response appearing above. Even after being a long reply it does not cover all the points you have made. I can give you very satisfactory answers to all the points you have raised. Because , you see, I have been on this journey of enquiry for a long time now. I’m much older, so I have seen, experienced life and thought over these matters for pretty long time from many different perspectives. In this quest I have been there, where thinking and perception wise you are today.
Still I will not say that a younger person can’t be a better thinker than what I’m today. Some people do have that talent, maturity beyond their age or experience as such.( Manish Chauhan is one such person though I know the areas where he lacks in insight, but am sure he will find those wisdom gaps in no time and take himself to higher levels of expertise!)
See, I don’t want to show I’m wiser than you. I have been wiser than many person’s who are older/experienced than me and same could be valid incase of some other individual and me.
I can ‘see’ a bright spark in you from the way you have planned or are attempting to do the insurance planning for yourself from whatever awareness level , information collected and resources tapped by you. Also the way you are trying to defend your stand.
I’m still in two minds whether I should paste that long comment which would be followed by again atleast two lenghty write ups!( Yes, I do write long and elaborate comments!)
Well, till the time I make that decision, I would just provide you with some info and some food for thought rather than an exact reply.
What is insurance:
A hedging mechanism or
An asset ?
Maximum cover multiplier allowed by insurance companies could go upto 30 times a person’s income at age 25 and may be upto 25 times his income at age 30. About 15 times at age 40. It would be reduced to 8-10 times only @ age 50 and 4-5 times at age 55. (So the information given to you by that LIC agent is not complete or proper!)
How much cover multiplier a person should choose at various ages, you think?
What was your income when you started earning and is it today? And how much that income will be say 3,7, and 10 yrs down the line, you think? How much income level you will reach by your retirement, can you guess, any idea?
How will the law of averages or the possibility of any event happening with a single individual is to be perceived as compared to a large group of individuals considered as a single entity ? Has this ever bothered you?
What do we do with the wealth we accumulate? Can we take it with us? Can we consume it or dare to consume it completely?
How is this wealth creation going to be impacted with two extreme scenarios of 1) ‘zero’ insurance 2) ‘maximum’ possible insurance cover allowed technically
Do Mukesh Ambanis, Laxmi Mittals of this world need insurance? or do they need no insurance or should not buy it? Is this insurance thing for the not so rich or middleclass individuals?
(What is the regulator for, is that claim ratio statistics read or interpreted correctly, why is a large monopoly- govt owned organisation which is not for ‘profiteering’ selling insurance at higher price to the citizens? Are these the ‘real’ citizens and others some kind of ‘step’ citizens that their interests are not to be looked after even though they are also contributing their savings for country’s development through buying insurance? What is the cost of a ‘feeling’ ? Is paying claim an unnatural thing or just a routine matter for a insurance company? Is everyone getting a insurance cover just because they wish to buy and willing to pay?)
Shahank, I liked your response to the point that you questioned my decision..thanks, lets converse further.
“You are assuming that you will be insurable and that too at the standard rates 7 years down the line”
I am 26 as of today, 7yrs downline…will I be insurable? ok..yes I ll be, provided I have adequate annual income to make me eligible for my insurance requirement.(If I m not wrong, one can be insured upto 10X 3yr avg annual salary..LIC rule, agent told me)….now, to get standard rates then, I shouldnt have any medical aliment or be a smoker or drinker..I m none of today…and hopefully, I acquire any of these habits/medical condition in future. Hopefully, I wont get any heart/diabetes or any such major problem in future.
Incase I develop any such ailment any time during the tenure/or before buying a new policy, I ll have to inform the insurer about it, that ways, I ‘d get rates higher than standard, which is has to be done, even if I buy a long term policy today
So, I ll be insurable.
“one needs to buy insurance or increase one’s cover atlest 6 to 7 times in a working life. If you think that the cover you will buy from a single insurer 7 yrs hence and keep it for the next 25 yrs and it would be sufficient for your future insurance needs,it will not be the case in actual life!”
As far as I know, my know-how maybe limited, one cant increase the cover of a policy during the lifetime of a particular “LIC” insurance policy. Also, any time if I want to increase my cover, a new policy should be bought.
My calculation for buying insurance is, it should be able to meet my liablities of future(child marriage, education, etc) on the very first day. For instance.
@33, I ll assess, what are my future liablities, so on that very day, I know how much my family ‘d need today to cover up all the expenses for next 25yrs.
Say, I die, the moment I receive the policy document in my hand. My insurance cover ‘d be able to feed them for next 25yrs.
Now I survive say another 7yrs..I m now 40
@40…I already earned 7yrs income ..saved some money…spent some..my cover is still intact…everybody’s happy.
Now, I die, my cover ‘d still be able to feed them for next 18yrs without hitch, nevertheless, my last 14yrs savings, ll add to it…so overall I dont need to increase my cover and my family can still survive…so effectively, my need for cover reduced over time.
@50…cover’s still intact, saved another 10yrs…spent some…fed my child, education etc.
my need for cover is reduced further.
My emphasis was cover at 33 should be big enough to cover all my future responsiblities that very day.
Now, if I take a smaller cover initially and then keep on increasing it say for 6-7 times, my premium ‘d increase everytime…for 2 reasons..one, increasing age factor…second..rising insurance amount. However, if I buy a big insurance at the age of 33, its effect ‘d be tappered over time due to time value of money. Please refer to premium calculator on LIC’s website, I drew above conclusion from there.
“Many writers seem to give undue importance to this claim settlement point! Why do we want to play the role of the regulator or not trust the systems and various mechanisms put in place to address any injustice incase it happens?.”
Importance to claim settlement isnt undue. It is a probability ratio. Higher the probability, safer you “feel”, it is a mere emotionally calming factor…
Well, role of regulator…I think forums like this are playing a big role in awakening and education of people, so that more and more people can counter/question the mal-practices followed in industry…and eventually, regulators ‘d take some action…we know its slow, but at least now they are in some action.
Humm..looks like, I got to dig more on this one. Thanks, though.
Prima facie your strategy seems to be sound but it is wrong one!
Two things. You are assuming that you will be insurable and that too at the standard rates 7 years down the line. Both may prove to be wrong notions. We buy insurance to basically cover these ifs and buts of life, isn’t it? So buy it for longer duration-keeps the planning open ended.
Second,one needs to buy insurance or increase one’s cover atlest 6 to 7 times in a working life. If you think that the cover you will buy from a single insurer 7 yrs hence and keep it for the next 25 yrs and it would be sufficient for your future insurance needs, it will not be the case in actual life!
Many writers seem to give undue importance to this claim settlement point! Why do we want to play the role of the regulator or not trust the systems and various mechanisms put in place to address any injustice incase it happens?. We are concerned about these socalled ratios and is the regulator sleeping over such issues? And is there any certainty that the insurer we trust the most is not going to play any dirty tricks with us eighter intentionally or unintentionally?
Riders are important. The waiver of premium type of rider secures the premium of the security we are buying through a insurance plan. Kind of a insurance of a insurance premium! Especially if we are buying heavy covers which demands big premiums(even in term insurance premiums could be heavy) we should cover it with a waiver of premium rider. And whether such a rider is available or not should be an important factor in the decision of choosing a product/plan. Disability is even more fearsome than a plain death scenario and unfortunately we do not have any standalone sisability products in India. So it has to be supported through some surrogate mechanisms and plans and the waiver of prem rider is one such surrogate mechanism.
My language may sound to be bit harsh. But please it is not to hurt anyone.
I would choose option 3 – Claim settlement ratio of company.
I would not wan’t my family to chase insurance companies every now and then when i am gone.
I am more comfortable with LIC even though i have to pay a higher premium.
Point 3, most important…I check it first thing.
1.Premium – I wont mind paying more, if it is easier to claim.
2.Rider – None, I dont believe in them
4.That ‘d be until I m 58.
5.Here’s what I have done, I m 26…I currently have term insurance for 7yrs, as I know, thereafter my insurance need ‘d increase, and I dont want my children/wife to fiddle with multiple policies later..so after 7 yrs. I ll re-assess my need and get a new insurance policy, that ll be for 25 yrs.
Why only till 58?…well, by then my child ‘d be around my age, and earning, hopefully, doesnt need my money and can take care of themselves. I ll save enough for my retirement, so to take care of me and my wife.So, even if I die, after 58, at least I dont have to worry about my child’s future, and my wife shall live on my retirement money.
Thanks for the points, however the main reason i asked this question was I wanted more variables which one can look at for their decision making !