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Saturday 19 April 2014

Who Buys Insurance Policies?

It is believed that 40% of all life insurance is sold in the last quarter (January to March) of a fiscal year. Clearly, tax planning continues to be an important (if not the most important) reason to buy life insurance. In IRDA’s latest release, life insurance penetration (or ratio of premiums as a % of GDP) for India fell from 3.4% in 2011 to 3.17 in 2012. I suspect if you compared ratios of ‘protection’ where you compare levels of sum assured (or actual amount of insurance) to GDP the trends might be similar. 

“This indicates that in the past three years, the growth in insurance premium is lower than the growth in national GDP,” states the IRDA annual report. 

We looked at about 2,000 people that used the life insurance tool. Consider the following learnings:

 •      75% are between the age of 28 and 45 – meaning, a large part of their financial obligations are yet to be met completely 
•      More than 55% of users have children to provide for 
•      More than 20% of users have a home loan where the total loan outstanding is more than the life insurance amount or sum assured – meaning, if these people unexpectedly passed away, their families will have to sell assets just to hold onto their homes, let alone the life insurance proceeds being used to live a comfortable life. 

The above paragraphs highlight 2 important points 
1)    Given that GDP growth has been pretty slow over the last couple of years, insurance penetration growth has been even slower 
2)    Of those that have life insurance, the amounts that are assured to the policy owner are often, grossly inadequate.

And yet, people continue to look at life insurance primarily as a tax saving method with some investment benefits thrown in. A decade ago it was common to have a customer ask the agent about the term life insurance premiums in case he continued to live – in which case, he considered premiums paid, a waste of money. While things have changed, there remains a large segment of the market that continues to believe so. One wonders if the same segment considers auto insurance a waste if they were fortunate enough not to have had any accidents in the year. A quick example of a typical 40 year old salaried employee trying to meet his tax planning needs will illustrate:

  • Investment done in PF for the year: Rs. 60,000
  • Balance required to complete the Rs. 1 lakh section 80C allowance:  Rs. 40,000 
  • Employee buys life insurance savings plan paying a premium of:  Rs. 40,000 per annum 
  • Sum assured or life insurance amount:  Rs. 4 lakhs 
  • Alternate way of saving tax: Buy a term plan with sum assured or life insurance amount of Rs. 1 crore for less than Rs. 20,000 and balance invested in savings instruments like PPF or other permitted instruments.

With less than half the amount put aside for insurance, the employee could get over 25 times the life insurance amount he currently has. 

The sum assured or the amount of life insurance can vary from 10 times the annual premium to over 500 times the annual premium paid for the same premium amount depending on the type of product bought. We do believe that labelling products by the level of protection offered might be a good start in ensuring more meaningful life insurance penetration.

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