The history of life insurance dates back to 3000 BC. The expression “YOGAKSHEMA” found in the RIG VEDA refers to the social welfare insurance that the ancient Aryans seem to have developed. The purpose of insurance is to cover the Risk of Loss and not to gain from it.
In the ancient times, people lived in a small confined area of a high plane or a jungle. They built & lived in huts.
If a hut falls/burns down for any reason, the neighbors and others in the village were committed to help the person to build a new one. People helped each other because they knew, they might be in need of it someday. In simple terms, they had an insurance.
The concept of modern insurance is similar to the village story. A pool of large number of unknown individuals make a small contribution which is given to the family in need. Losing the primary breadwinner of the family could be catastrophic. Without an insurance, it could land the family in a long and sustained financial depression.
But what’s wrong ?
When my brother had been to a bank few years ago, an insurance agent approached him and asked him to buy an insurance coverage for 10 lacs. The agent told him, it will cost him just a 1000 rupee per year, if he buys a 20 year policy.
Like everyone, my brother asked him, what will I get after 20 years ? The agent honestly said “You will get nothing”. My brother was furious and argued with the agent for 30 mins that how can he suggest him a product which doesn’t pay anything in return after 20 years. Eventually my brother told the agent not to bother him anymore and returned home.
Since, I was already into financial planning those days, he called me the same evening and told me all about, how he dodged a bullet from an insurance agent who tried to sell him such a no brainer product. After listening to the story, I explained my brother all about a simple, traditional Term Insurance Plan. I told my brother that he hadn’t dodged a bullet but had made a fool of himself. Such agents are hard to come by, who tries to sell you a term plan. Unfortunately, the poor agent was almost beaten to death, by my brother. This is a true story and that day I understood, what’s wrong with the way we think about Insurance. Humans have become irrational animals and cannot digest the fact of paying someone something and not getting anything in return. Nobody looks at the big picture these days.
The Rise of 2-in-1 Products
It’s not just my brother who thought that way but 85% of Indian population. Instead of educating the people and make them understand, the insurance industry wizards came up with an ingenious idea. Combining insurance and investment. The insurance market flooded with money back or endowment policies like Jeevan Anand, Jeevan Saral etc. Later came ULIPs which had market exposure and promised to make investors rich. Over and above, our fool of a govt gave them tax breaks. People accepted the idea of getting “something” back and jumped in. Agents were paid high commissions for selling these products and agents did so.
In the midst of marketing gimmicks, people lost the sight of insurance and started using it like an investment product. It’s the new norm. Insurance + Investment. Two birds at one shot, right ?
WRONG. Without even getting into the numbers, I can vouch that in most cases, it does not even add up to 1 bird. You now pay 2.5 times higher premiums to get 25 times lesser insurance, let alone the returns. There is already a post about LIC Money back policy demonstrating the actual returns. You can read it here https://wealthmatix.com/licmoneyback/
When you combine insurance and investment, we dig up our own grave. Insurance must be treated like an expense, and not investment.