Insurance:

How to Deal with an Inadequate Insurance Cover
By Shiv N. Majumdar

Nilay Sharma, a 30-year-old executive, has an insurance cover on his life for Rs 2 lacs. Like most Indians, therefore, Nilay is inadequately insured.

His policy was bought 5 years back, when Nilay had barely started his career. With higher earnings and an additional responsibility of his family, he now considers whether he should increase his insurance cover and if so, to what extent.

He has two choices:

• To buy new cover to reduce or eliminate inadequacy, or
• To ignore insurance and to build his financial soundness.

Adequacy of insurance cover:

Nilay estimates that in his absence, his family would need about Rs 10,000 per month to get by. That would mean Rs 15 lacs if we consider an interest rate of 8% per annum.

Adequacy would also mean protection against a misfortune 10 years or 20 years from now. If we consider an inflation rate of 6% per annum, the corresponding adequate cover for 10 years or 20 years would be Rs 27 lacs and Rs 48 lacs respectively.

Nilay, naturally, is astounded by these figures and wishes to take a guilt-free decision.

Cost of cover:

For a 30 year old, costs of cover for various types of insurance policies are as under:

(Rs per thousand per annum)

Term insurance for 20 years (No Maturity Benefits)	3.70
Whole life insurance plan- without profits	12.95
Whole life insurance plan- with profits	23.71
Endowment insurance plan- without profits	28.54
Endowment insurance plan- with profits	47.96
Money back policy	62.80

Implications:

Cover Planned	Rs 15 lacs	Rs 27 lacs	Rs 48 lacs
Additional cover required	Rs 13 lacs	Rs 25 lacs	Rs 46 lacs
Costs per annum:	Rs	Rs	Rs
Term insurance	4,810	9,250	17,020
Whole life-without profit	16,835	32,375	59,570
Whole life- with profits	30,823	59,275	1,09,066
Endowment- without profit	37,102	71,350	1,31,284
Endowment- with profits	62,348	1,19,900	2,20,880
Money back policy	81,640	1,57,000	2,88,880

Without going into the details of maturity benefits in these various types of policies, it is clear that Nilay would have to choose to have no maturity benefits either through a term plan or a whole life policy without profits. The latter would mean that for a truly adequate cover he would need to shell out about Rs 5,000 per month to ensure a value of not less than Rs 10,000 per month for his family during a 20 year period from now.

As a person's age goes up, his real returns would be even lower since insurance premium would go up with entry age.

The dilemma:

Nilay is faced with a dilemma. If he chooses to buy a term insurance plan, he would be adding Rs 17,020 per annum (Rs 1,418 per month) to his expenses since there would be no maturity benefits.

On the other hand, if he opts for maturity benefits, he would need to pay about Rs 5000 per month. This would leave a small amount in hand to take care of his other needs.

The option to ignore insurance altogether and to build a sound financial position would mean he would be giving more weightage to the fact that insurance is not an efficient tool for investments.

It is not necessary for Nilay to carry any guilt in such a situation, because it would still be an "emotionally intelligent" decision. If the risk were too high, insurance companies would not survive bankruptcy to continue in business.