Judge this one by the COVER

The Sharmas live in a lovely flat in Cuffe Parade. Anup, 55, is a successful businessman, and his wife Laxmi is a homemaker. Their daughters Neha and Nikita, both in their mid-to-late twenties, are married and independent. Anup and Laxmi have sizeable assets, and no liabilities. But as for their insurance…well, let’s just say it needs a bit of streamlining.

ANUP Sharma is pleased with life, and with good reason. His business has grown very well, since its modest start in the 1980s. He and his wife have two well-settled daughters, and dote on their grandchildren. Nobody understands better than Anup that providing security for one’s family is one of the most important things in life.But recognising what’s important is only half the deal; the other half is doing it right. When it comes to providing security for the family, most people somehow assume insurance is their saviour. Of course, there’s no denying that it’s important, but it should be bought after careful consideration of one’s needs. Most people, including successful businessmen like Anup, buy insurance for all the wrong reasons, such as tax savings, returns, and maturity value.

All four members of the Sharma family had several policies, covering the entire spectrum of products in the market—endowment, moneyback policies, whole-life plans, and the latest rage, ULIPs (unitlinked insurance plans). The family’s annual premiums added up to about Rs 18 lakh for almost a couple of dozen policies. Anup was concerned that although the market had delivered fantastic returns, his policies had not appreciated as much as he would have liked. So we met with the Sharmas to discuss their overall needs and specifically discuss their life insurance requirements. I asked Anup about his reason—a single reason—for buying life insurance. His answer was in the plural: tax saving, returns promised, and the security of his family.Now, Anup is a man of substantial means: he has no liabilities, and has assets worth around Rs 10 crore, plus his home and sizeable business interests. Yet, he was sold a seemingly random succession of policies for not just himself, but also his daughters and grandchildren.

Spring cleaning
After considering the Sharmas’ needs, we identified a few keepers from among the motley bunch, including the Jeevan Shree, and the older Jeevan Suraksha with guaranteed benefits. We took up the more recent purchases for review, to decide which ones to keep, and which to surrender. We then met up with the Sharmas’ insurance agent, who was proud of his insurance-selling prowess. He told us of his numerous awards, and even pitched a few products to me. I said I had term plans that addressed my needs, and added that I planned to scale up my coverage soon with another term plan. He was quick to respond: “Why go for a term plan? They yield no returns. And who buys them, anyway! Ninety-five per cent of policies sold are investment plans.”

But we returned to the real purpose of our visit, which was not me, but Anup, and what needed to be done with his plethora of policies. We discussed several options, but the agent insisted that these were the best options in today’s market. He felt strongly that Anup should not only continue with his existing policies, but also buy some more that he had picked out.

In all fairness, the agent was trying to be helpful. He proceeded to explain the basics about endowment policies, moneyback plans, and ULIPs. He said, “Be it traditional endowment plans or ULIPs, an investor should be aware that these investments are for the long term. Insurance covers that period of time, which could be from youth to fatherhood. Besides, the savings that Anup has been making regularly, including tax saved every year, add substantially to his capital, along with maturity benefits. That will help him for h i sretirement.” The agent went on, “In developed countries, ULIPs have given a yield of 18-20%, stretching over a period of 15 to 20 years—something no other financial instrument has given to date. Endowment policies have also given good returns.”

I then shared my thoughts. First and foremost, I said, let’s understand the meaning of insurance and how it needs to be viewed. Webster’s dictionary defines life insurance as “insurance providing for payment of a stipulated sum to a designated beneficiary upon death of the insured.” Life insurance is meant to cover the risk of dying early, and not the risk of living long.

One should first evaluate whether to retain the risk, or to transfer it to the insurance company. Ideally, one should transfer only risks where the consequences of an eventuality could put your finances out of order and hurt the security of one’s family. Other than that, one should retain all other risks that one can comfortably manage, without any harm to lifestyle or security.

I pointed out that what Anup’s agent was focusing was what Anup would get at the end of the term of a policy. But the most important concern was the security of Anup’s family, should something happen to him today. The agent’s logic sounded confused to me: on the one hand, he was saying, here is a product you need to buy to address the risk of dying early, but on the other, he was saying here’s what you’ll get at the end of the term. For the Sharmas, extra income is hardly a concern, considering that they are well off.

Also, many people erroneously believe they can only save regularly through insurance, and not through other forms of investment. That is closer to a pitch to sell insurance, than to the truth. Regular saving can be done through each and every form of investment. Anup’s agent’s taxsaving argument is also questionable. Anup already invests Rs 70,000 in the Public Provident Fund each year. He can get additional tax benefits only on an additional Rs 30,000, as per the provisions of Section 80C of the Income Tax Act.

The agent’s assessment of ULIPs giving 18-20% returns in developed economies, unmatched by any other financial instrument, were vague at best. I knew of policies bought six years ago, and the variable universal life policies, as they are known in western countries, are yet to break even. Some of them could put even an Indian ULIP to shame, by levying 80-100% charges in the first year! Check out the performance of some of the largest insurance companies, such as MetLife US, Prudential US, and AIG worldwide, on their websites. Over ten years and longer, returns for variable universal life products with an equity component range from 3% to 13 %, and for some options they are as low as -2%. Now here comes the clincher: these returns only factor in the fund management charges and direct expenses—they don’t even reflect policy sales charges, mortality and expense rate charges, administrative charge, and surrender charge. If those charges were factored in, performancewould be significantly lower, according to MetLife’sPerformance Evaluator document. As a client, Anup was reasonable in expecting his agent to get his facts right, and to understand his situation. But the agent had been selling all sorts of irrelevant policies to his client.

We made a detailed assessment of the Sharmas’ goals, cash flow and net worth statements, and insurance policies. They had no liabilities. Their assets were of good quality, and most of them could be liquidated at short notice. Rental income provided an alternate stream of money for the family, in case business slowed down for any reason.

Although the Sharmas have paid premiums for years, the accumulated values of their policies are low, and returns for endowment and money-back policies are around 4-6%. Considering their goals and needs, we saw no compelling need for life insurance at all. They had adequate medical insurance cover, with bonuses for claim-free years, so no worries there.

Why didn’t Anup need life insurance? Because he had sizeable assets, no liabilities, and no dependents. So we surrendered the low-return policies on which only a few premiums had been paid. We kept policies that were set to mature in another four to six years, and high-value guaranteed policies such as the discontinued Jeevan Shree and Jeevan Suraksha. There was no need to insure the lives of Anup’s wife Laxmi, their daughters, and their grandchildren. We decided to surrender recent policies on which three premiums had been paid, and instead opt for PPF, mutual funds, stocks, and real estate to accumulate a corpus. We bought a term plan of Rs 1 crore for the Sharmas’ daughter Neha, and decided to review her sister Nikita’s insurance needs after a couple of years. We bought a home owners’ “All Risk Policy” for the Anup and Laxmi’s home, in case of fire or theft.

Life insurance is provides security for your family, protects their lifestyle in case they lose you, the one they depend on, and ensures that the goals for which you’ve worked all your life can be achieved in your absence. Life insurance is not an investment or expense. Consider it for risk cover, not for maturity value, returns, or tax benefits. Once you’re clear about this, you will certainly make the right decisions when it comes to life insurance.Amar Pandit is a Certified Financial Planner and Director, My Financial Advisor