Three Smart Answers
During my years of association with the life insurance industry, I have seen people procrastinate buying life insurance by saying one of the following things to whoever tries to persuade them to purchase life insurance:
I do not need life insurance at this stage.
I have enough wealth and aim only to generate further wealth for my family and myself, and life insurance fetches too low a return.
I can not afford life insurance as my earnings are too unstable and inadequate to keep a long-term contract in force.
This paper aims to examine the strength of the above objections in-depth and conclude whether anyone in the above three categories of people avoiding life insurance can comfortably disregard life insurance products.
Statement 1: Why Should I care to buy Life Insurance at this life stage?
Two types of people think that they are not the right candidates for life insurance policies. One is the people in the age group of 22 to 28 (Gen Z). These individuals have their own steady incomes, promising futures, and hardly anyone depending on their incomes. Two, the people on the wrong side of the 50s. They are under the impression that they have already overcome the days of maximum financial risks and life insurance at this life stage is hardly essential for them.
Let us first consider Gen Z (and some younger elements of Gen Y, too) who think life insurance is not for them to buy. By saying no to life insurance, they miss an opportunity to grow a savings corpus over a long period, bringing decent, risk-free returns. Proceeds from life insurance policies can be used to fund the higher education of children, buy better houses, and medical treatment for their parents, who may not remain solvent at the age of 75 or 80. Life insurance policies are available to people in their 20s at very low premiums. As age goes up, the premium goes up at a higher rate. At higher ages, an individual may not be considered eligible for some insurance plans (e.g. term assurance plans) because of some adverse health conditions. It is a common experience that people start realizing the power of life insurance in their 40s when they have a few dependents and have seen some people suffer for not buying enough life insurance. But, at that age, insurance is costlier and returns from the policies will be much less than what that would have been, had the policies been purchased at younger ages. Even in developed countries of Europe and Asia Pacific, younger people prefer saving products to Unit Linked Insurance Products (ULIPs).
Now, let’s shift the focus to the people saying no to life insurance in their 50s. While it is true that they have already reached a few financial milestones in life or are in the process of reaching them, they still have one important goal to reach. They are yet to live their post-retirement days with pleasure and honor. To live a tension-free free peaceful life in the future, they have to make as much provision as they can, during the remaining period of active working life. Financial risks are involved in two contingencies of life. Dying prematurely and living too long post-retirement. With the increase in longevity, one should brace for living up to 90 years or even more. The question is, will they simply add years to their lives or add life to their years? If they choose the latter, they have to get some passive incomes, in addition to earning pensions which anyway will prove to be inadequate once they hit the age of 75. The solution is building a saving corpus and the best way to build that is to join a forced saving scheme like Deferred Annuity. As income peaks in one’s 50s, creating a good saving corpus in the remaining few years of working life is not too difficult. In the developed world and also in emerging economies like Malaysia and South Africa, people are buying retirement-oriented life insurance products. That keeps their Insurance Penetration (defined as the ratio of total premiums collected to the GDP) high.
Statement 2: I have enough wealth to fall back on, in case of any disaster
The number of affluents is on the rise in India. Some are earning salaries that were unthinkable even two decades ago. Gen X/Y/Z individuals are on a good financial footing primarily because their fathers (and even grandfathers in some cases) saved a good portion of their money and allowed their children to inherit the wealth. This wealth can help the next generation to take financial risks (calculated) and prosper. Indians were once known as great savers. They saved to build houses, educate their children, and meet emergency financial needs. All this was made possible by them even when the level of income from jobs/businesses was not too high. Without studying in top Business Schools, they were able to understand the rudiments of financial planning.
Now that there is wealth, it is natural to think that the wealth is good enough to take care of any future financial crises. The fact is, no amount of wealth is enough. If you are rich, you will visit private hospitals that have a fair idea about your net worth. If you are very rich, the aspirations and demands of your children will be very high and you must have wealth all the time, to meet their demands. You have to maintain a certain lifestyle which can claim a good portion of your wealth even when you are not doing too well in your professions. When you are a victim of lifestyle inflation (also known as Lifestyle Creep), you will start spending on things that are pure luxury products. The wealth that you inherited may evaporate within a few years. Examples of such events are available around all of us in society. Therefore, we need a mechanism that can prevent wealth from getting drained easily.
The present generation will have to negotiate with a lot more uncertainties in life. Technological changes resulting in the unemployment of skilled workforce, Pandemics, geopolitical crises, natural catastrophes, cyber-attacks - all can put a dent in the existing level of wealth. Financial risks can come from multiple frontiers. This is a different world from what we saw before, in our life. I have named only some important financial risks here.
There are other dimensions of the problems of the rich and the nouveau riche. These people tend to invest most of their wealth in high-risk/high-return assets like stocks, real estate, and even cryptos. After all, as a monied person, you are always under pressure to invest a good part of your money in mutual funds, stocks, and real estate. You are not keeping your money in bank accounts and feeling wealthy. There are people and institutions which are on the mission of making you wealthier! As a result of this, you are likely to invest in assets that can result in the erosion of wealth.
Life insurance policies, besides managing financial risks resulting from untimely deaths and disabilities, can enable one (however rich can he be) to protect his wealth, growing his wealth in a controlled manner and making money available only when it is necessary. The rich can not give insurance products a miss if they want to remain rich.
Category 3: I can not afford life insurance
Here also there are two types of people. One type expects life insurance to be cheaper. For them, life insurance is a low priority and they can consider buying life insurance only if the product is made available at a lower price. Since they do not attach high value to life insurance, they consider the price of life insurance coverage as very high. The fact is, the price of life insurance products is arrived at by the actuaries after taking into account the expected future mortality, interest rate, and management expenses. The actuaries can not take too optimistic view about the future. That does not happen anywhere in the world. By purchasing a life insurance policy, you immediately create an estate under your name, even though you have paid only one premium to start with.
The second type of people who find life insurance as not affordable belong to the weaker sections of society. They have unstable incomes. Many of them are employed in the unorganized sector offering little social security benefits. Many Gig employees (e.g. employees of food aggregators or cab aggregators) fall under this category. Do they not need insurance? Honestly speaking, they need insurance the most. But, most of them give life insurance a miss simply because they think, that they may not be able to pay premiums regularly.
They cannot say no to life insurance simply because they do not have stable incomes. They can make good use of government-sponsored schemes like Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) and Pradhan Mantri Suraksha Bima Yojana (PBSBY). PMJJBY offers a life insurance cover of Rs. 2 lac (likely to be increased to Rs. 5 lac shortly). PMSBY offers a risk cover of Rs. 2 lac in case of accidental deaths. Although these insurance schemes do not have any savings element, they are still good for people with modest and/or irregular incomes currently. They can buy more comprehensive types of products when they are in a better financial condition. I would also suggest that these people prefer employers who provide comprehensive group insurance schemes covering risks of life, health, and disability.
If the insurers know all this, why are they not modifying their Business Model?
In the preceding section, I have mentioned why most people avoid buying life insurance in time. Insurance remains a push product for most Indians. But, why should it stay a push product after 68 years of the industry getting nationalized and after 24 years of it getting the approval of the government to allow private companies (with globally acclaimed foreign insurance partners) to operate in the market? Why have Indians in possession of in-force life insurance policies hardly increased over the years despite Indians of all economic strata earning more and therefore requiring higher life insurance cover? The number of individual policyholders in possession of at least one in-force life insurance policy does not exceed 25 crores in a country of at least 90-100 crores of insurable Indians. The reasons for the pathetic state of insurance penetration are as under:
Insurers are busy launching one-size-fits-all types of products, primarily. India is a vast and hugely populated country with varied social norms, aspirations, and preferences. Therefore, their life insurance needs vary widely. The insurance need of a farmer is not the same as the need of someone employed in the IT/ITES sector. But, the products available for them are the same. The insurers have not developed products for the needs of specific market segments. They continue to carry some old Product Templates and are obsessed with market share and topline growth. So long as they see their topline grow which happens primarily by visiting existing customers and through Churning (i.e. by making the customers surrender policies and buying a new one), they don’t find any reason to change their business model. Insurers are not doing enough research to find out the evolving needs of the youth either. Even the microinsurance products available in the market for “Economically Weaker” sections of society are nothing but shorter versions of existing products available for the general population! No real effort has been made to build features that can be of use to poorer people (except the mode of premium payment). There is hardly any serious effort at “Data Mining” although the insurers are large repositories of historical data. Today’s customers look for product attributes that can specifically address their financial risks. Since that is not available in one-size-fits-all policies, they are not excited about life insurance.
Insurers are too “Distribution Channel” oriented instead of “Customer Oriented”. The insurers always think about what their agents/brokers/bancassurance partners can sell, rather than what should be sold to the customers. They think that the abilities of the insurance intermediaries are limited and they can sell only some old “Plain Vanilla” kind of products. This is why they have failed to improve the skill set of their intermediaries. They think it is almost impossible to transform the skills and mindsets of the agents. But, the insurers also expect quick results from the intermediaries. Therefore, they advise them to sell and hard sell. After the nationalization of the life insurance sector, LIC agents were instrumental in spreading the message of life insurance, both in urban and rural areas. The insurance agents had become almost family members of Indian households. But that era is gone. Now, both the agents and insurers want quick results as the pressure is on each of the operational units to show results every single day. Some agents are still doing good work in the rural areas. But, in general, insurance agents have not changed with the times. Their old professional tricks are no longer working well in all the segments. So, the insurers are playing safe by launching products that the agents are comfortable selling. Brokers and Insurance Marketing Firms (IMF) are no different. All are in a hurry to collect money from the market rather than insuring a greater number of Indian lives. Bancassurance partners go one step further. Some of them sell regular premium plans like single premium products and often do not explain the product features properly. Insurers are happy to see Topline and Market Share grow. Who cares for the customers when the boss pats them on the back?
Most Insurers are still not selling Insurance!
The biggest tragedy for the industry is that most insurers are not selling insurance! Barring LIC, which has the mandate to insure the lives of all hues of Indians, most other insurers are busy grabbing low-hanging fruits in the market and also selling products that are more investment-oriented and less insurance-oriented. The low-hanging fruits are the wealthier people of the urban areas who are rich and easily visible. Most private insurers encourage their agents to make a beeline to the rich and nouveau riche of society to sell big-ticket insurance policies. Yes, this has helped the insurers to reach their business target but at some cost. These policies (mis-sold in many cases) either lapse or get surrendered quickly resulting in the loss of both the insurers and the insureds. The current IRDAI Annual Report says that Insurance Penetration decreased last year from 3 to 2.8 primarily because of the withdrawal of some tax benefits from the high sum assured policies. So, a lot of high-income people prefer tax-saving plans to insurance plans. The insurance intermediaries are enticed into the business of insurance selling by saying that they can be rich within a few years by targeting the HNIs and also NRIs. Sadly, the insurance business for the intermediaries can not develop this way. Many young agents lose interest in this profession when they find that this business can not make them Million Dollar Round Table (MDRT) agents or rich quickly. Now, let’s see which products many of the insurers are fond of selling now. All leading private insurers are collecting 40 to 60 percent of their premium incomes by selling Unit Linked Insurance Products (ULIPs) only. ULIPs promise high returns although I have not come across too many people getting high returns from ULIPs. More importantly, insurance is not an investment and you can not expect to earn high profits from life insurance policies. Life insurance is an income replacement device in case of someone’s premature death. It also enables you to save securely. But, most insurers, especially the bank-promoted ones, are promising high returns from insurance products and are selling Mutual Fund-type products (ULIPs) with a tinge of insurance. This is a disservice to the insuring public, to say the least. These insurers are subsidiaries of the companies leading in the Mutual Fund industry and they can not utter two different things from one mouth, after all!
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What is the Way Forward?
As discerning readers, you can now easily understand what should be done to bring sanity to the industry. Firstly, the insurers need to speak more to the insurable people. They are depending too much on insurance intermediaries. Instead, they should come out of their offices and meet people including existing customers. This will enable them to develop the right products for diverse market segments of the industry. This job can not be outsourced to some consultants who have little experience working in the industry.
Insurance products must be sold like insurance products only. No sensible insurer in the world can promote insurance as a high-return product. Insurance in general and life insurance in particular, should bring peace of mind. Insurance is a product that can protect wealth and grow it safely and securely, besides managing financial risks arising out of premature deaths, disabilities, and retirement. Insurance is not a tax saving scheme although some tax benefits are available in most of the products.
Finally, the regulator should set the right indices to measure the performance of the insurers. Growth of premium income and Insurance Penetration are good indicators of progress. But better indicators can be the increase in the number of insured lives (and not policies) and the increase in 61-month Policy Persistency (which indicates the percentage of policies retained by insurers after five years). I would also suggest that the decision-making team of the regulatory body should mostly consist of people having adequate industry experience.