There’s a myth that everyone needs a life insurance policy. Here are four categories of investors who don’t!
Most Indians harbour the notion that they cannot do without life insurance. One of the first ‘investment’ products that young Indians are encouraged to buy, on landing a job, is an insurance policy. But this is based on a flawed understanding of life insurance as a product.
Life insurance isn’t designed to enrich someone on your death. Its primary purpose is to compensate your dependants for the loss of your income in the event of your untimely death. So yes, there are many categories of folks who simply don’t need to buy life insurance. Here are the main ones.
No income
Are you a student, a college pass-out preparing for competitive exams or a person who’s quit her job to pursue personal interests? Then you have no need for a life insurance policy. A life insurance cover is intended to ensure that, in the event of your death, folks who depend on your income are not left financially unsupported.
Strangely enough, quite a few insurance products (usually traditional plans) in India come with in-built insurance covers on the lives of children and other young dependants. These are completely avoidable.
There’s no doubt that, in the event of any unfortunate event happening to you, your family will be bereft and will grieve deeply for you. But this emotional loss can surely not be compensated by a monetary pay-out from an insurer.
Therefore, as long as you have no income and aren’t contributing to your family finances in any way, there’s no need to have a life policy to compensate your dependants for the loss of your life. It is for this very same reason that many insurers don’t offer life policies for homemakers as well.
The loss of a homemaker’s life can leave a family broken and in emotional disarray, but her contribution to the household simply cannot be made up by a monetary compensation from an insurance company to the family.
Strangely enough, quite a few insurance products (usually traditional plans) in India come with in-built insurance covers on the lives of children and other young dependants. These are completely avoidable. As a parent, you’re surely not looking to enrich yourself from the loss of a child’s life.
No dependants
When thinking of life insurance policies as an investment, most folks forget that the pay-out from the policy will not come to them but to their chosen beneficiaries. If you have no dependants whom you need to support, you don’t need a life insurance policy either.
Young folks who have just signed up for their first job may not need life insurance at all, as long as they are single and their parents and family members do not rely on them for financial support. Folks who are married and don’t have children may not need life insurance if their partners earn and are self-sufficient with enough income to live comfortably after their passing.
Folks in their late 40s or 50s may not need a life cover if their children are already independent and their life goals- such as owning a home or the surviving partner’s retirement needs – are already funded by their investments.
The only exception to the above cases is if you have outstanding loans or liabilities that your family or spouse will be saddled with, in the event of your death. In this case, a life policy that will cover your debts in full, will ensure that their finances aren’t burdened by your loans after your passing.
Retirees
If you’ve bid goodbye to a successful career and are currently enjoying a comfortable retired life with your retirement benefits, you do not need an insurance policy. Most insurers in fact do not offer term covers for folks beyond 60 years of age.
Across insurers, term policies taken in your 50s typically cost 4-6 times more in annual premiums than those taken in your twenties.
Many people do sign up for life insurance at an advanced stage in their careers because the idea of their spouse or dependants receiving a big payout on their death seems reassuring.
But the cost of buying a new policy at a lathe stage in your career is prohibitive. Given that insurance companies are well aware of higher mortality rates beyond 60, they budget for this in your premiums.
Take the case of HDFC Life’s Click2Protect, a pure online term plan. If you are male and buy this policy when you are 25 or 35, the annual premiums amount to about Rs 11,300 and Rs 18,600 respectively. But try to sign up when you are 55, on the cusp of retirement, and the premium shoots up over Rs 65,600. Across insurers, term policies taken in your 50s typically cost 4-6 times more in annual premiums than those taken in your twenties.
Therefore, while the idea of buying term cover in your fifties to ensure a lumpsum to your spouse in the event of your death may seem appealing, you need to weigh this benefit against the burden that the annual premium will impose on your finances if you live long.
If you are keen to leave your spouse a nest-egg after your passing, investing an annual sum in bonds, mutual funds or alternative avenues would be a better idea, as it would offer more flexibility than life insurance.
Comfortable net worth
The final category of folks who don’t need life insurance are those who have large enough net worth to live off their investment income (or passive income). If your assets minus liabilities runs into crores, the annual income from these assets may be enough to ensure that your dependants are taken care off, in your absence.
There’s no point in shelling out additional insurance premiums annually in such cases, as the transmission of your wealth to your beneficiaries will be enough to take care of their needs.
In the Western world, folks often use whole life insurance plans for estate planning, because transmission of wealth from one generation to another entails hefty estate taxes. High net worth individuals seek out large insurance covers instead which are more tax-efficient to pass on wealth.
In India though, there’s no estate duty yet (though it may be levied in future). Therefore, having a Will and nominations in place ensures that dependants of HNIs get to enjoy their investments and the passive income flow from it, after their passing.
This is third in a 5-part series that covers all you need to know about how to go about choosing a term insurance plan. Read the first two parts here:
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