Life Insurance: When, Which and How Much

September 25, 2015, Chennai

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Life insurance policies is the most mis-sold product in financial industry.

We see policy premiums being 
paid by retired people on their lives. Policies have been sold on the lives of homemakers not involved in 
any economic activity and children and under the garb of endowment, money back and whole life policies. 
The policies are being bought and sold for whole lot of wrong reasons: Tax saving tool, safe investment, 
assured returns and finally some insurance. 
It is heartening to see the positive effects of awareness programs and literatures being published on the 
net and print media. Though there is an increasing awareness about the fallacies of traditional insurance 
policies, but in the absence of an unbiased advice it is difficult for people to be sure about their alternate 
action / actions. 
First and foremost insurance is not an investment. It is a tool to provide financial protection to the 
dependents of the bread winner in case of his / her untimely death. Governments’ world over provide tax 
benefit on insurance to encourage people to create provision for their dependents in case of unforeseen 
circumstances. 
‘WHEN to buy insurance policy’? The key word is dependents. Insurance policy should be bought on the 
life of the earner when he / she has dependents. Till such time focus on wealth creation, that you can 
enjoy in your life time. Our maxim at Finscholarz is ‘START INVESTING THE MOMENT YOU START EARNING, 
BUY LIFE INSURANCE AS SOON AS YOU HAVE Dependents.’ 
 
As the wealth increases the insurance needs should come down. An individual in his 30s who is the sole 
breadwinner of his family with young children, dependent parents, mortgage to be paid and limited 
wealth should have maximum insurance. As the financial goals keep getting fulfilled the insurance should 
come down, thus releasing more cash for investment and current expenses. 
By this principal lives of a retired person, non-earning child and home maker not involved in any economic 
activity doesn’t need to be insured. All this money should be used for creating wealth. 
WHICH type of policy should be bought? A policy that can fulfil the goal of protecting the standard of living 
of the dependents and provide enough funds for future goals. This goal can be easily achieved with a 
simple, economical term policy. No goal other than financial protection of dependents can be assigned to 
insurance. Any other product from this basket of products is a drain of resources and a hurdle in creating 
wealth. 
What difference will it make to a person’s wealth in twenty years? If a 30 year old male buys a popular 
endowment policy for a sum assured of Rs.10.00 lakhs, his annual premium will be around Rs.54000. If he 
survives the policy till maturity, he will receive Rs.10.00 lakhs plus accrued bonus on the policy. Going by 
the past and present bonus rates he can expect around 18.60 lakhs to 19 lakhs after 20 years. That is a 
return of 5.7 % per annum. With inflation rates hovering in double digits, a return of 5.7% per annum on 
savings is like a leaking tank which cannot help you get richer. A simple alternative to such policy would be to buy term insurance of Rs.10 lakhs, which will cost around 
Rs.2000 per annum and invest the balance Rs.52000 in PPF account which gives similar tax benefits and 
safety of returns. At the end of 20 years with an average rate of 8.5% per annum, the maturity amount 
will be more than Rs.25.00 lakhs! A slightly riskier but more appropriate alternative would be to invest 
the balance of Rs.52000 in equity market for the initial 15 years ( average return of 14%) and closer to the 
goal, move the funds to safe debt instruments (average return of 8%).The amount at the end of 20 years 
can be a whopping sum of Rs.36 lakhs. With proper planning and appropriate tools the investor can create 
almost double the wealth, with similar savings and without risking the goal fulfilments. 
Simple rule of thumb is to buy a term insurance policy for covering the risk and invest the balance in 
instruments that suit your goal and risk profile. 
HOW MUCH insurance to buy? There are rules of thumb in terms of multiples of income and expenses. 
But the safest and most cost efficient method is based on future expenses or needs of the dependents. 
We recommend calculating the present value of all future expenses including goals (don’t forget inflation) 
and reducing it by income producing wealth. This should be the sum assured of your term policy. Your 
planner and adviser should be able to help you with this calculation. 
And always choose an adviser who is not earning commissions by recommending you the products. 
Check his / her credentials, licences and source of income. It is a simple trick to avoid becoming a victim 
of mis-selling. 

Life insurance policies is the most mis-sold product in financial industry. We see policy premiums being 

paid by retired people on their lives. Policies have been sold on the lives of homemakers not involved in 

any economic activity and children and under the garb of endowment, money back and whole life policies. 

The policies are being bought and sold for whole lot of wrong reasons: Tax saving tool, safe investment, 

assured returns and finally some insurance. 

It is heartening to see the positive effects of awareness programs and literatures being published on the 

net and print media. Though there is an increasing awareness about the fallacies of traditional insurance 

policies, but in the absence of an unbiased advice it is difficult for people to be sure about their alternate 

action / actions. 

First and foremost insurance is not an investment. It is a tool to provide financial protection to the 

dependents of the bread winner in case of his / her untimely death. Governments’ world over provide tax 

benefit on insurance to encourage people to create provision for their dependents in case of unforeseen 

circumstances. 

‘WHEN to buy insurance policy’? The key word is dependents. Insurance policy should be bought on the 

life of the earner when he / she has dependents. Till such time focus on wealth creation, that you can 

enjoy in your life time. Our maxim at Finscholarz is ‘START INVESTING THE MOMENT YOU START EARNING, 

BUY LIFE INSURANCE AS SOON AS YOU HAVE Dependents.’ 

 As the wealth increases the insurance needs should come down. An individual in his 30s who is the sole 

breadwinner of his family with young children, dependent parents, mortgage to be paid and limited 

wealth should have maximum insurance. As the financial goals keep getting fulfilled the insurance should 

come down, thus releasing more cash for investment and current expenses. 

By this principal lives of a retired person, non-earning child and home maker not involved in any economic 

activity doesn’t need to be insured. All this money should be used for creating wealth. 

WHICH type of policy should be bought? A policy that can fulfil the goal of protecting the standard of living 

of the dependents and provide enough funds for future goals. This goal can be easily achieved with a 

simple, economical term policy. No goal other than financial protection of dependents can be assigned to 

insurance. Any other product from this basket of products is a drain of resources and a hurdle in creating 

wealth. 

What difference will it make to a person’s wealth in twenty years? If a 30 year old male buys a popular 

endowment policy for a sum assured of Rs.10.00 lakhs, his annual premium will be around Rs.54000. If he 

survives the policy till maturity, he will receive Rs.10.00 lakhs plus accrued bonus on the policy. Going by 

the past and present bonus rates he can expect around 18.60 lakhs to 19 lakhs after 20 years. That is a 

return of 5.7 % per annum. With inflation rates hovering in double digits, a return of 5.7% per annum on 

savings is like a leaking tank which cannot help you get richer. A simple alternative to such policy would be to buy term insurance of Rs.10 lakhs, which will cost around 

Rs.2000 per annum and invest the balance Rs.52000 in PPF account which gives similar tax benefits and 

safety of returns. At the end of 20 years with an average rate of 8.5% per annum, the maturity amount 

will be more than Rs.25.00 lakhs! A slightly riskier but more appropriate alternative would be to invest 

the balance of Rs.52000 in equity market for the initial 15 years ( average return of 14%) and closer to the 

goal, move the funds to safe debt instruments (average return of 8%).The amount at the end of 20 years 

can be a whopping sum of Rs.36 lakhs. With proper planning and appropriate tools the investor can create 

almost double the wealth, with similar savings and without risking the goal fulfilments. 

Simple rule of thumb is to buy a term insurance policy for covering the risk and invest the balance in 

instruments that suit your goal and risk profile. 

HOW MUCH insurance to buy? There are rules of thumb in terms of multiples of income and expenses. 

But the safest and most cost efficient method is based on future expenses or needs of the dependents. 

We recommend calculating the present value of all future expenses including goals (don’t forget inflation) 

and reducing it by income producing wealth. This should be the sum assured of your term policy. Your 

planner and adviser should be able to help you with this calculation. 

And always choose an adviser who is not earning commissions by recommending you the products. 

Check his / her credentials, licences and source of income. It is a simple trick to avoid becoming a victim 

of mis-selling.