The basic purpose of buying insurance should be to protect the family from loss of income due to an early death of the main income earner. The financial consequences of an early death of the main income earner can be disastrous for a family. The only effective solution to manage death risk lies in buying adequate life insurance cover. Saving should, obviously, be a secondary purpose of buying life insurance except for those who have no family liabilities. The need to cover the risk of death should be predominant among all needs and the product that can provide an adequate coverage at very economical rate is pure term insurance. Life insurance products cover the risk of financial losses due to the premature death of the life insured. They also cover the risk of living too long by making payment in lump sum or in installments at old age.
However, the risk coverage in life insurance means, "Covering the risk of financial losses due to the death of the life insured."Most life insurance products are sold as risk covering devices, though the saving component in the premium is higher than the share of premium for risk coverage. In other words, though life insurance is identified with the coverage of death risk, a major portion of the premium is allocated to saving investments to give a reasonably good return to the policyholder. Such products are known as `Endowment Policies'. Ironically, though the premiums in such type of policies are very high, coverage of death risk is quite low. The policyholders are happy that on the date of maturity of the policy they will get much more than what they had paid. However, some policyholders do not want to wait so long to get the maturity benefits.
They want to enjoy the maturity benefits under their policies much earlier than the date of maturity. Insurance companies are only too glad to develop products, where a part of the sum assured is made available after every four to five years and the balance is paid at the time of maturity. These policies are popularly known as `Money-Back Policies' and are in great demand. Premiums in these policies are higher though death risk remains the same in comparison to the policies were maturity benefits are paid only once at the end of the term of the policy. Such products suit both the insurers and the agents and are liked by policyholders. But there is a lack of realization on the part of the life insured that if he dies during the term of the policy, the sum assured paid to the family would be very meager and would not even marginally substitute the income he was contributing for the maintenance of the family during his lifetime. |
