Till date, all my posts on life insurance plan were focused on why we should avail life insurance plan. At the same time, it is a fact that same shoe doesn’t fit all. In certain cases, a life insurance plan might not be required. To clarify that in this post, life insurance plan means term insurance plan. Normally “Insurance” in India means “Life Insurance” only :) but traditional plans like money back policy, endowment plans etc.
From a personal finance perspective and as a thumb rule, if you buy any financial product then you should ask 5W’s i.e. What, Why, When, Where and Who/m. The possible reasons to be shared in this post are also linked to one of these W’s. Let’s check out
Life Insurance Plan – 5 Possible Reasons Why You Should Not BUY
1. I am Filthy RICH:
I wish i could say this during my lifetime. Trust me that day i will stop the premium of the life insurance plan availed by me. In my opinion, Filthy Rich are those people who run out of ideas on how to spend the money :). I know a couple of them.
The “WHY” explains the reason for not buying a life insurance plan. Sometime back i was reading a book on Money Matters. Now you must be thinking about a book on “How to become Rich?” or “How to become a Millionaire?”. Trust me if someone can become a millionaire just by reading books then i would have been in the list of at least Top 1000 richest people in the world.
The book was all about the importance of money in the life of an individual. It concluded that beyond a point money loses importance in life. At this stage, you are filthy rich. In other words, you attained monetary/financial nirvana. This milestone is different for different people. Though greed has no limit but if you attain nirvana then you don’t need life insurance plan.
The reason why you buy a life insurance plan is to safeguard financial interests of your family. If the financial interests are already safeguarded then you don’t need any life insurance plan. In other words, Why to waste money on insurance premium?
2. I don’t have any Dependents:
Here the term dependent is used literally. It also means financial dependents. Therefore, financial planner suggests continuing life insurance plan till you achieve all your goals i.e. duties/responsibilities. For example, if my kid’s education is completed and they are married then they are financially independent. What will i do with the life insurance plan? The only exception is if you are planning to buy or bought life insurance plan as a part of inheritance plan. I covered it in my post, Term Insurance Policy – Five Surprising Reasons to Buy.
On the contrary, a new trend is emerging in the society. Earning couples are deciding not to have a baby or kids. In other words, Double Income No Kids is now a permanent lifestyle. Besides DINK’s, from my PG batch, i know 7 people who decided not to marry. Though there can be personal reasons but trust me financial independence is a key reason for some of them. The people with No Kids are of the opinion that they would like to spend their earning only on themselves. Therefore in such cases for “Whom” they should buy life insurance plan.
3. I don’t have any source of Income or Earning:
If the person does not have any source of income or earning, life insurance companies are reluctant or refuse to offer insurance cover. For example, my wife is a housewife and she does not have any source of income. In her case, she does not need any plan/cover. A life insurance plan is availed to cover a loss of income or loan/liability.
Financial planners suggest availing life cover equivalent to 10 times your annual income. I bought my first online term insurance plan to cover my home loan liability. Similar to joint loans, insurance companies/executives are pushing joint life insurance. You should always check the benefits and finer details before opting for such covers. Joint life insurance cover does not make any sense if one of the spouses is non-working.
4. I am already paying too high insurance premium for traditional plans
As i keep highlighting in my posts against the traditional plans like money back policy or endowment plan. They provide penny coverage and are more of investment plans. Similarly, there is a big mystery for an investor whether ULIP is an Investment plan or life insurance plan? As i shared i am also one of the victims of traditional insurance plans because of some good marketing by the insurance company.
These days insurance companies are selling each and every cover as “must have”. You cannot buy each and every cover as i shared in my post, Critical Illness plan. Assuming i buy a term insurance cover equivalent to 10 times my annual income. Also, i buy health insurance cover. Besides these two i must be having a couple of dead life insurance plans like money back or endowment plan. Now my total insurance premium payout must be more than 10% of monthly take home salary.
Trust me it does not make sense to pay more than 7.5% of net take home salary towards insurance premium. At the same time, it does not make sense to surrender the existing plans as surrender value in India is very low normally 30% of the premium paid excluding premium of first few years.
Therefore, point i am trying to make is that if you already opted for “traditional” insurance plans. If your insurance premium payout is more than 7.5% of net take home salary then it does not make sense to opt for another life insurance plan.
5. I am settled abroad or planning to settle abroad
NRI can purchase most of the life insurance plans like resident Indians. It is better to clarify from the insurance provider for exclusions (if any). The objective of this point is not to discuss whether NRI’s can avail term insurance plan or not. My concern is related to country of residence and cost of living in the country of residence.
Normally the premium paid by resident Indian and NRI is same provided the risk involved is same. Assuming an NRI is staying in a country of high risk like African countries, Afghanistan etc. Alternatively, some countries are perceived to be at high risk from the perspective of health conditions. Therefore, life insurance premium is much higher in case an NRI is residing in any such high-risk country.
Secondly, the most important point is the cost of living. The cost of living for an NRI in local currency should be adjusted against INR. A policy of 1 Cr might be sufficient for me considering i am staying in India. Assuming i shift to the USA. In this case, a policy of 1 Cr might be peanuts considering the cost of living in the USA adjusted against INR. Therefore, it does not make sense to avail life insurance plan in India as you will be under covered in such scenarios.
Lastly, in the case of a dispute between the insurance provider and the insured NRI, you cannot pursue your case abroad. In such cases, a consumer forum in India is the right forum to register the complaint. In most of the cases, it is not feasible for NRI’s to pursue a case in India. Therefore, it is always advisable to avail life insurance plan from the local insurance provider in the country of residence.
Words of Wisdom:
Life Insurance Plan is must have but not always. Therefore, you should rationally and logically evaluate the need of life insurance plan. Always remember that you cannot buy or avail each and every cover available under the sun. Though term insurance plan is a must but as we observed that not in all the cases.
If you are already stuck with traditional plans then you need to check the insurance premium payout. If you are in early years of the traditional plan then it is better to swallow the bitter pill and surrender the plan. I realized my mistake after 8 years and at that point financial loss was huge. Therefore, i didn’t have any other option but to continue with existing plans.
Last but not least, the best part of life insurance plan i.e. term insurance plan is that you can stop/surrender any time. There is NO Investment value. For example, wife of one of my friends was working and availed term insurance plan. Due to some family compulsions, she had to leave her job. After leaving the job she stopped premium of term insurance plan and it lapsed. Ideally, you should surrender by following proper process even though it is a term insurance plan. In other words, term insurance plan is need-based and there is no liability to continue the plan when not required. Hope you liked the post.
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I am 32 years old. Should I commit myself to a long term policy, say like 30-35 years or opt for shorter term e.g 5-10 years while buying a term plan. The reason I ask is, in most likelihood your insurance needs may change every few years and also newer,better, cheaper insurance products keep coming up in the market. So doesn’t it make sense to buy for shorter term and renew every few years. I know there is a cost benefit in later years if I buy long term right now, but I will pay higher premiums during early years (money that can be invested elsewhere)?
The term insurance premium is all set to increase because of high risk (now NO Claim will be rejected if the policy has completed 3 years) though competition may keep it under control. Moreover as you grow old, you may develop certain health conditions and you may not get new policy in late 30’s or early 40’s. You can always avail additional/top up policy at later years as per your requirement.
In my opinion, you should avail term insurance till the age you are expected to fulfill your responsibilities like kid’s marriage, study etc. For example, if you expect to fulfill your responsibilities by age of 60 years then the tenure of term insurance plan should be min 28 years.
Thanks for your insight Nitin. Another question, is it better to buy one term plan from a single provider or split the cover required between 2 or more plans. E.g buy one plan with a sum assured of 1 crore or two plans with 50 lacs each?
For 1 Crore, you may buy single term insurance plan.