India's Love Affair with Life Insurance
Updated: Sep 7, 2020
Try to find an Indian family that doesn't hold a single traditional LIC policy. Just one. Believe me you'd be having a very difficult time accomplishing the task. After decades of LIC's dominance and the advent of private insurers in the late 90s, the sector has completely blown up. It has penetrated its influence to every corner of India. LIC isn't just a brand anymore. It's a symbol synonymous with a culture of savings and discipline for millions of households in India. However somewhere along the journey as insurers got more and more creative with their policies, Indians got more and more lost. Let us explain.
A typical Indian family has a couple of files (or more) dedicated to their insurance policies in the office. When we get around to discussing insurance, this is how the conversation usually goes;
"How much premium are you paying per month on your 12 policies?"
Client: "Around 2.50 lakhs a month"
"Okay. What is the combined life cover you're getting on these 12 policies?"
Client: (after an awkward silence) "I'll have to check"
"No problem. Also I was wondering why you have a policy that insures the life of your 3 year old?"
(awkward silence again)
What is Insurance really?
The Oxford definition of life insurance is "insurance that pays out a sum of money on the death of an insured person". In other words, It should be bought with the intention of protecting the dependents' needs for when the breadwinner passes away. How strange isn't it then, that a policyholder remembers exactly how much premium they're paying but doesn't have the slightest idea of the amount their family will get should something unfortunate occur? What's the premium being paid for? The answer is a return. They've bought the policy not with the intention of protecting the family, but to make a return. Here's the real question, why are we going to an insurance company to make an investment?
The Twisted Reality
We're of course talking about the ridiculously popular Unit Linked Insurance Policies (ULIPs) and Traditional (a.k.a. endowment, moneyback, whole life) plans. For those unfamiliar with these terms, these are products offered by insurance companies that promise the 'dual benefit' of insurance + investment. To the general unsuspecting investor, this seems like a great proposition, 'health bhi, wealth bhi' right? Not quite. Dig deeper and you'll know you're not quite getting either. To explain with a simple analogy, imagine you go to the supermarket to purchase a toothpaste and a toothbrush. You find a combo pack for Rs. 200. Moments later you see if purchased separately the toothbrush costs Rs. 100 and the toothpaste costs Rs. 30 saving you Rs. 70. What do you do? Now let's apply this to your life's savings. ULIPs and traditional plans are synonymous to our combo pack here. The only difference is, investors are unable to see through the opaque cover of complexity. They're unable to see how much extra is being taken away from them; every month, every year, every decade, and what an astounding amount that difference will become. There's no doubt that traditional plan and ULIPs have prevented millions of Indians from creating the wealth they deserved, a figure that perhaps runs into thousands of crores.
Source: Say No to Endowment Plans and ULIPs,Value Research: The tables give the example of a healthy 35 year old male.
If you're wondering how such ineffective products have found their way into crores of Indian household. It turns out that this deeply ingrained thought process is encouraged by Insurance Regulatory and Development Authority of India (IRDAI) itself. In fact, the IRDAI defines the industry's success by how much premium is flowing in from its customers, not by the extent of life cover they're providing. The official metrics used to define the industry's success are 'insurance density' i.e. the per capita premium charged and 'insurance penetration' i.e. percentage of premium to GDP. Talk about self-centered measures! There's actually no published data available that reveals the extent to which Indian citizens are insured. No wonder insurance companies have optimized their operations to garner premiums by any means necessary; even if it means turning a blind eye to pervasive mis-selling by a force of relentless salesmen. This is the equivalent of BlueFort Financial measuring its capability by amount of money collected, not the incremental wealth made for the client. Not very client centric, is it?
What Should I Do?
The bottom-line; NEVER combine insurance with investing. Do them separately. For your insurance needs, purchase a term plan ONLY. It's a pure life cover policy that promises to pay the insured's family in case of an untimely death. And it's unbelievably cheap! A healthy 30 year old male can go online and get a 5 crore life cover for about Rs.5,000 a month. A typical ULIP/traditional plan will barely get you a 10 lakhs cover for that kind of premium. Insurance is an expense and should be treated like one. Once you have purchased a solid term plan, invest the rest of your savings in a high quality portfolio of equity and debt depending on your ideal asset allocation.
We live in a capitalist economy. And if something will sell, you can be damn sure it will be created. Just because a product exists doesn't mean you have to purchase it, especially if everyone around you is buying. Most financial products sell on the pretext of 'diversification' when really they give no tangible added benefit. Fear of missing out (FOMO) is a strong emotion. We'd advise you to stay away from these unnecessary policies and stick to a long term high quality and liquid portfolio that has the ability to give you stellar inflation beating returns.
Siddhanth Jain | Partner