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Why do people purchase Insurance?

    IndianMoney.com Research Team | Saturday, February 21,2009, 05:56 PM
 

If we ask someone why he/she has taken life insurance, they usually give the following reasons. But it gives information where people go wrong when they buy their life insurance cover,

1. To save tax

It’s true that Section 80 of Income Tax Act provides deduction of the amount paid as insurance premium from the assessee’s taxable income subject to limits. If the only purpose of buying insurance is to save on tax, then it’s the costliest way to do so. If someone does this early in his/her life with policies like endowment or money back or even ULIP, their ability to create wealth reduces by a very high degree.

2. To save/invest

This is another reason to buy insurance. Savings is generally understood as the amount remaining with a person after he/she meets all their expenses and other cash needs. If one has to build wealth, savings need to be channelized into an investment with exact time horizon and goal. But purchasing an insurance policy is neither savings nor investment; it is simply an effort going waste.

3. Agent’s compulsion

This is one of the commonest causes we get if we ask someone why he/she bought insurance policy. Insurance advisors are drilled to think that “insurance is always sold and never bought” and this mindset results in an advisor selling insurance for all wrong reasons. Survival of the insurance advisor is the only driver here and not the need of the buyer.

4. To plan for retirement

Insurance companies have developed these products keeping in view the tax exemption available under the Income Tax Act. The same reasoning that insurance is not an investment product applies here as well. Gone are days when the returns were assured by the insurance company so true retirement planning may be achieved more efficiently and economically using other financial products.

5. To provide security for children’s education

This is one of rightful reason for which insurance is to be bought. However, the risk to be covered is not of the child but of the parents. Many of the children policies do not provide this option by default and the parent has to pay an additional premium to cover his/her risk.

6. Bank’s demand for security

This means it is only due to the pressure put forth by bank (to safeguard its loan) that one will buy insurance. Otherwise, he/she will not get the loan, in this situation, the purpose is good but it’s not bought with the awareness of one’s risk exposure. Again, it will be a double curse if products like ULIP/Endowment/Money back are selected. On one hand one has to repay the loan EMI and on the other hand, he/she needs to pay heavy premium towards such ‘with profit’ insurance policies. There could be indirect compulsion because of the collusion/business association between the lender and the insurance company.

7. Relatives’ recommendation to buy insurance

This is one of the most common scenarios in many households, especially if your uncle/aunt is retired and/or has taken up selling insurance as second career. It’s no secret that insurance advisors, at least in their early years, will be asked to target their ‘natural market’ such as their own household members, relatives, friends, etc. to sell the minimum number of policies to keep their license alive. Here also insurance is bought for reasons other than the one it’s meant for.

8. Friends’ influence

Friends are another young group they might insurance to buy an insurance policy. But in this case also the purpose of insurance has not become very clear.

9. Parents’ influence

This is not surprising, given the fact that including people who graduate from the college have not much idea about the basic concept of insurance. So if one is not into job, it’s very unlikely that he/she will have any idea of what insurance is other than the advertisements one sees in medias which again does not say much how insurance works. Even if parents tell their children to avail themselves insurance, it’s for reasons other than for what insurance is meant for.

10. To cover life risk

This is the correct reason for which insurance is to be bought. The very purpose of life insurance product came into existence was to provide economic security to the dependents of the breadwinner in his/her absence (death). If one is a young earner without any health problem a term insurance is the right kind of cover for him. It costs less and because of level premium, he/she will feel less and less burdened as time progresses and their earnings increase. The money saved after buying an insurance policy can be channelized to an investment plan.

IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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