Should you take that insurance policy?

A couple of weeks ago, an old friend of mine wanted help regarding his investments. While he was comfortable with a wide range of products, insurance was a strict no for him. His argument was “why should I make my widow richer than wife?”. It’s an argument I come across often particularly from those who have built wealth through aggressive stock picking or mutual funds. Their argument is: why bother about insurance when the same money can be used to earn 25-30% returns!
Much of the criticism against insurance is also due to the fact that it has been sold rather than the investor asking for it. The fact that every investor ends up getting at least one call a month from an agent doesn’t help matters much. As a result, most insurance policyholders have been sold a policy according to the selling techniques of the agent and needless to say, most policyholders are not aware of their policy details. However, the time has come for investors to change a few things about their thoughts on insurance and here is why.
To start with, most of us have been steadily increasing the balance on our liability account. Unlike our parents or grandparents who believed in spending out of their income, the current generation has been partly funding its spending. As a result, an average Indian middle class family will have a combination of loans in its portfolio ranging from home loans to car loans to personal loans. Even if some one manages to keep away from these loans, he is sure to carry a small liability on his credit card. While the individual may have the regular source of income to clear his dues over the long term, an unexpected event such as death could change the picture and the family could end up with a loan bag of a few lakhs of rupees.
Many argue that they have enough in the kitty to take care of the family over the long term in the form of property and bank balance and hence don’t need to set aside cash for an insurance policy. However, many don’t realize that a few thousands of rupees can help the individual’s family from using up long term assets. Take the case of a 45-year old individual who is sitting on a loan of Rs 30 lakhs borrowed to invest in a property which at present costs around Rs 45 lakhs. Let us assume that the individual has invested in the property only a couple of years ago and hence there is not much change in the loan figure. As you are aware, the principal amount comes down in a small way during the first few years of the loan tenure.
Now, let us assume that the individual has not made an effort to go in for the required insurance cover and on the other hand, is happy with the Rs 5 lakh cover (which was forced upon by him during the early part of his career by his insurance agent uncle). He had kept away from insurance on the pretext that there wasn’t much liquidity after paying home loan EMIs. Because of the property investment, even his investment portfolio was not impressive and he could manage to build a liquid asset portfolio of only a couple of lakhs.
Consider an event where the above individual meets up with an accident and suffers untimely death. Now the burden of loan repayment falls on the spouse who does not have a regular source of income. Property being the only asset, she is forced to sell it to cover up the dues. In addition, she has to worry about the future of two children who would take at least a decade to provide regular source of income to the family. From a situation of comfortable living with own property and a healthy bank balance, the family is forced to worry about debts and future living due to lack of planning.
The individual could have saved the trouble of sale of property for his family if he had set aside around Rs 25,000-30,000 towards a term insurance plan. If you break that into monthly component, the cost works out to around Rs 2,500 per month. Surely, it is not a big sum to protect a property which is worth Rs 45 lakhs and ensure a peaceful future for the dependants?