The fallacy of buying insurance

The great insurance fallacy

Insurance companies work on a simple idea: The older you are, the more likely that you will die.

As a result, the annual premium goes on increasing for a newly taken policy, as you become older. Please see the attached screenshot out of one of my presentations which brings out clearly the mortality charges  per annum for a policy of Rs 1000. A mortality charge is the portion out of your premium which is used to buy insurance cover. The remaining amount goes into the investment plan chosen by you and to cover umpteen charges stated directly or indirectly in the policy document. Annual policy administration charge, the up-front charge, switching charge, commissions paid etc. (Actually for these very reasons it never makes any sense to buy insurance policy as an investment - it makes sense only to buy term insurance. Unfortunately LIC flourished using it's monopolistic position for several years and gave absymal returns of 5-7% on the investible amounts remaining after mortality charges and it was the power of compounding that worked in your favour when you thought LIC gave you great returns).

This is particularly important for those below 45 since it does not make sense to buy any insurance cover after that. If you see the attached slide you will find that at the age of 26 mortality charges for a policy of Rs one crore will be Rs 14500, at age 46 it will be Rs 39800 and at 66 it will be Rs 253000! (And at that age you don't need insurance cover since presumably you have built your own corpus to replace you after your death)

Please send this message to all young people for whom it's still not late, so long as they are under 35-40.

Happy investing!

Madhusudan Sohani

(The mortality charges have been sourced from an actual policy document of ICICI Prudential)