Wednesday, April 25, 2012

Insurance is for protection, not wealth creation :

Life insurance has been invented by the society as a financial tool for creating a corpus to be utilised when financial support or protection is needed the most in someone's life. Insurance, therefore, is very different from savings, banking, and investment.

Any insurance scheme or policy is based on the principle of mutual pooling of small amounts of money by large numbers of people; using the amount for those few unfortunate members of the society who suffer financial loss or loss of financial support because of some tragic event. Insurance helps in recovery from an unfortunate situation; takes away stress from the social fabric; and helps the affected person in bringing life back to normalcy at least financially.

With the very first installment of premium paid to a life insurance company, the policy holder makes sure that the family acquires an umbrella of financial protection which is guaranteed to the family in the event of the unfortunate demise of the policy holder. It is, therefore, rightly said that there is no substitute for life insurance.

The wealth that it creates with very small amounts paid as premiums guarantees a decent life to the dependents; higher education to children; and even marriage or other important functions in a manner that would fulfill anybody's dream.

In fact, those who seek investment-oriented benefits from life insurance end up with inadequate sum assured when it is needed the most and they lose the basic benefits of insurance planning. Those who look for investment through life insurance may consider it at a later stage of life when sufficient savings have already been made over a period of time; but those who are in the early years of their earning life, need to focus on the insurance component of life insurance products.

There are so many other financial tools available which can guarantee medium-to-high returns over a period of time, but they cannot guarantee payment of a huge lump sum amount matching with the requirements of the dependents on payment of a few installments of premium which sometime may not be even 5% to 10% of the benefit received.

About a decade back, when the unit-linked insurance plans (Ulips) were introduced to the market in a big way by new life insurance companies, there was a sudden inclination on the part of the prospective policy holders to buy Ulips with a view to maximize return on the premium amount paid by them.

Over a period of time, Ulips became the favourite of the market and gradually the investment return started influencing the product design and development, marginalising the insurance component. Some products provided very negligible life insurance cover but focused on market linked returns. As a result, there has been substantial downsizing of the sum assured vis-a-vis total number of policies sold and it has finally resulted in massive erosion of life insurance protection, which was the very purpose of selling or buying of life insurance.

However, of late, there has been realisation on the part of the insurance regulator as well as the insurance companies for firmly dealing with this aberration and bringing back focus on the insurance component of the life insurance policy. Insurance companies, existing and prospective customers are slowly moving towards a more balanced view of the purpose and benefits of life insurance.

A person looking to buy life insurance should therefore, first look for adequacy of risk cover in the product and then choose a particular plan according to other features available with different products of different companies. Life insurance is for ensuring peace of mind and not for pieces of dividends and interests.
Source : ET

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