Many people are drawn to expensive plans that provide coverage and fairly modest returns because they believe they will get ‘at least something’ when they reach maturity.
A lot of people perceive getting insurance as a game of betting. Strange, no?
Let’s say you cover yourself with a sum insured of Rs 10 lakhs at a yearly premium of barely Rs 2,000. This implies, according to a few, that you are ready to gamble and that you will end up dead this year and hence voluntarily cough up Rs 2,000. But your insurer is predicting that you will not die yet and is equipped to pay your family Rs 10 lakhs if you do.
Now if you outlive this vicious cycle, which we’re sure you’d like to do, you lose the gamble and your insurance firm leaves the room with Rs 2,000. If you win the bet, you know what happens.
This continues over a span of 10, 15, or 20 years, depending on the term of the insurance. And thus, you may think, that it goes against your morality to put a gamble on your life. This would only compel you to conclude that an insurance policy that provides a profit would be a much more desirable alternative since you could regard it as an investment.
Insurance ≠ Investment
First and foremost, insurance is not a financial instrument. When you put your money into something, you hope to get some returns, right? This is not the case with plain term insurance. If you happen to die, your designee is entitled to the maturity benefit. Nobody gains anything if you outlive the term. Which may appear to be a bad bargain. But, well, that’s the point of life insurance! Surprisingly, life insurance is a lot more about death rather than life.
Investors choose insurance plans that offer them returns even if they live in an effort to receive something out of the funds they provide to the insurance business. In exchange, they turn a blind eye to pure term insurance plans. Although everybody is free to hold their own opinions, it is normal to believe that term insurance is the simplest, cheapest, and the finest kind of life insurance.
How do Insurers Operate?
The total sum you pay to the insurance provider is not invested. The premium you pay is constructed up of three parts.
- Charges (Agent Commissions and Distribution Channel Expenses)
- Mortality Premium
- Investment Amount
To knock it all off, the amount authorized to be invested in equities may be as little as 8 to 10% of the overall investment. As a result, you should not anticipate a high return on your insurance policy.
Additionally, the amount may seem enticing now, but it will be significantly less valuable after you receive it. Suppose you are guaranteed Rs 2 crore 20 years from today. Add up inflation and that would be worth roughly Rs 62.36 lakhs after adjusting all the other expenses for the year.
Commissions – How does that work?
Every insurance product has its unique set of commission criteria. However, the agent’s fee is often the highest in the initial year. It dips over the succeeding three years and then sinks even further. During the first year, your agent may earn a cut of about 15 to 35% of your premium amount. It will reduce to around 5% and 15% in the next three years. Beyond that, it will range between 2.5% and 7.5%.
Simply put, the upfront compensation (the amount paid in the first year) is the maximum, followed by relatively smaller trailing commissions. As a result, the greater the amount you pay in premiums, the greater the profit to the agent.
For openers, don’t look up to an agent to even bring up the subject of term insurance. He will constantly try to sell the most expensive options. His livelihood depends on commissions, and he will strive to sell you the product that profits him.
Next, don’t put all your faith in your agent. He is mostly just concerned about himself. He will try all in his power to persuade you that you require a specific product.
The easiest way to buy adequate health and life insurance. Well, Ditto Insurance tries to provide a completely different experience from those spammy tell-callers who waste your time and energy. Now, you can choose the right policy at the best rate by comparing it across insurers. All this while sitting in the comfort of your home.