Unit-linked Inadequate Life Insurance

The biggest problem with Ulips is that if you use them to buy an adequate amount of real insurance, then you could consume most, if not all of your income. Of course, I use the word ‘insurance’ to mean what it should: money that your family will get if you die. 

As a general rule, any earning person should be insured for at least ten years’ income. However, life cover in Ulips, almost universally, is exactly ten times the annual premium. Therefore, to get life cover equal to ten times your annual income, you will have to pay ALL your income as premium. The maths is unshakeable. No matter what the salespeople or the analysts say, anyone who has a family should not put even a paisa in Ulips (or any other investment) before they buy a life cover policy using pure term insurance. Once you have made your family’s future secure with 10 times your annual income, tackle investment as a separate and different kind of question. 

Let me explain the numbers in a little more in detail. If your post-tax, in-hand income is Rs 10 lakh a year, you should have a life cover of at least Rs 1 crore. If you think about all that your family will have to spend on if you die suddenly, you will realise that even this amount is barely adequate. Most families will actually need more. If you do not believe me, make an actual multi-year budget. The good news is that such an insurance cover is quite reasonably priced if you buy it through term insurance products. The bad news (for Ulip salesmen) is that buying Rs 1 crore life cover in the form of Ulips will require an annual premium of Rs 10 lakh—your total income! 

If you actually discuss all this with an insurance salesperson, they will tell you that Ulips also have investment bundled with insurance. While that is true in theory, in practice, any sensible saver should first get adequate life cover, and the only insurance product that fits the bill is pure term insurance. 

Once you have the insurance in place, you will be better positioned to evaluate investment options. This is because any investment should be evaluated on parameters like liquidity, volatility, safety, transparency, returns and suitability for different time frames. The same saver can have different needs and saving goals at different points of time. Sometimes, as circumstances change, you may want to move some money from one kind of investment to another. For instance, from a volatile but high returns type to a safe and steady one. At some point, you could suffer a professional crisis or a job loss and may need to stop investing for a year or two. These arer eal issues that affect almost everyone at some point. Will a Ulip, a single, inflexible product that bundles insurance and investment into a long-term commitment, serve your purpose is such situations? That’s a question you must ask. 

One question that every saver should ask is why Ulips are limited to offering cover worth 10-times the annual premium. The answer gives you an insight into the anti-saver ideology that permeates the Indian insurance industry. The insurance regulator, IRDA, has mandated 10-times annual premium as the minimum life cover that Ulips must provide. However, in the actual products, the industry only offers the minimum. Why? Because they are not interested in the life cover business. The money lies in running the investment business, and so we have an ‘insurance’ industry that always designs products with the bare minimum insurance. While this makes perfect sense for the insurance companies, whether or not it works for you is something you have to think about.