Why do we buy Insurance?
Most people start buying insurance policy as a means to buy life cover, as small savings and to avail tax benefits. Some others buy children policy, joint-life policy and health insurance. Those who have a home loan would get a home loan cover for the outstanding loan amount. These days getting a health cover is more prevalant. Pension plans and annuities too have gained popularity in recent times. Infact a good majority of the 400 million Indian urbanites have bought some form of insurance or the other (apart from the mandatory motor insurance).
So, why do we buy insurance?
There is widespread belief among us that the sum assured in a policy means premiums paid are returned with assurance. In a way it is ingrained in our minds that insurance is some form of a "capital-protected" investment compared to other financial products such as mutual funds or equities. And given how religiously the Indian middle class pays their premiums over the last 30 years, insurers have been encouraged to offer a variety of savings plans, investment plans, market linked investment plans, retirement/pension plans and the quick selling tax saving plans (especially in March of every year) as insurance policies. To the extent until the pre-ULIP era, buying an insurance policy was considered a very responsible and prudent financial decision of every household.
What is the outcome?
With the opening up of the insurance sector to private players there are over 300 million policies in force - in 2011-12, 44 million new life policies were issued with a combined premium of Rs.2.87Lac crores (Rs.2.87Trillion). To put in a different perspective, in terms of premiums underwritten annually (life + nonlife), the life insurance segment contributes to 4.1% of India's GDP. This outcome evidently puts insurance as a preferred financial product of Indian households right behind #1:fixed deposits and #2:gold. In terms of corpus accumulated, LIC policies alone have Rs.15Lac crores while all mutual funds (debt+equity) put together is half that amount @Rs.7.6Lac crores (including corporate accounts).
Some guiding questions..
Now that your insurance policy is no longer a pure risk cover and that it has an element of investment/savings attached to it, how do you know what kind of investment risks you have undertaken by buying such a policy? Given your commitment to save diligently over a long tenure, are you rewarded with returns equitable to the risk undertaken? Given rising inflation rates, how do you know whether a sum assured of Rs.1 crore after 20 years is sufficient to cover your family's future monthly expenses? How could you tell for sure that you are not over paying for an annuity policy? These questions are best asked to a financial planner who would help you find the right answers and guide you to make prudent insurance and investment choices!
So, why do we buy insurance?
There is widespread belief among us that the sum assured in a policy means premiums paid are returned with assurance. In a way it is ingrained in our minds that insurance is some form of a "capital-protected" investment compared to other financial products such as mutual funds or equities. And given how religiously the Indian middle class pays their premiums over the last 30 years, insurers have been encouraged to offer a variety of savings plans, investment plans, market linked investment plans, retirement/pension plans and the quick selling tax saving plans (especially in March of every year) as insurance policies. To the extent until the pre-ULIP era, buying an insurance policy was considered a very responsible and prudent financial decision of every household.
What is the outcome?
With the opening up of the insurance sector to private players there are over 300 million policies in force - in 2011-12, 44 million new life policies were issued with a combined premium of Rs.2.87Lac crores (Rs.2.87Trillion). To put in a different perspective, in terms of premiums underwritten annually (life + nonlife), the life insurance segment contributes to 4.1% of India's GDP. This outcome evidently puts insurance as a preferred financial product of Indian households right behind #1:fixed deposits and #2:gold. In terms of corpus accumulated, LIC policies alone have Rs.15Lac crores while all mutual funds (debt+equity) put together is half that amount @Rs.7.6Lac crores (including corporate accounts).
Some guiding questions..
Now that your insurance policy is no longer a pure risk cover and that it has an element of investment/savings attached to it, how do you know what kind of investment risks you have undertaken by buying such a policy? Given your commitment to save diligently over a long tenure, are you rewarded with returns equitable to the risk undertaken? Given rising inflation rates, how do you know whether a sum assured of Rs.1 crore after 20 years is sufficient to cover your family's future monthly expenses? How could you tell for sure that you are not over paying for an annuity policy? These questions are best asked to a financial planner who would help you find the right answers and guide you to make prudent insurance and investment choices!
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