Insurance is a scam!

Insurance is forced upon young professionals by family, friends, advisors and everyone. Insurance is sold on the fear that "what if things go wrong". But there're lot of things insurance companies will NOT tell you. Insurance companies only sell policy if they assess risk is very low. In this post I will reveal them to you and suggest a few alternatives.

1. Term Insurance

Term insurance is taken to provide a lumpsum financial aid to your loved ones in case of your death. You're advised to take 1 Crore, 2 crore coverage and you pay a monthly premium. For a 40 year old person, monthly premium is almost 2500 INR (including 18% GST)

Problem with term insurance

• Inflation adjusted, 1 crore coverage 30 years from now is worth effectively only 17 lakhs. So while 1 crore looks like big amount today, 20-30 years down the line its value may drop significantly, so the money your loved ones get from insurance may not be enough to support their immediate financial needs
• Only option is to increase coverage by 5x, 10, which also means your premium will shoot up 5x 10x
• Term insurance covers you only till 70 years of age. (A few cover till 80 at very high premium). Beyond that you're on your own, so you anyway have to plan for your retirement.
• No surival benefits. (Some term insuracne policies these days collect extra premium, invest a part of it market and then promise 200% premium return) 
• LIC's Single premium term insurance premium is almost 75% of sum assured (for those in 35-45 age group)- If I am paying so much premium I can rather own that risk, invest somewhere and try to get some good returns.
  
• Covers only death. You've to buy health insurance separately and plan separately for other risks in life (like job loss, property damage, theft etc)
• If we've keep buying a dozen different types of insurance- one for death, one for health, one for vehicle, one for home etc, total premium outgo will be a significant portion of our income
• Timely claim approval is NOT guaranteed. Insurance companies have large claim teams NOT to process claims faster but to findout if they can reject your claim under some silly reason. Despite paying all the premium, submitting all the documents you're at the mercy of insurance companies for claim processing, having to follow up, visit dozens of time, undergo detective investigation, escalate on social media, take legal remedy etc- too much stress and effort.

2. Health Insurance

Health insurance is supposed to cover your medial expenses

Problem with term insurance

• Deductible: Depending on policy terms, some 25000 to 3 lakh ruppes from your bill amount you've to pay from your pocket for each claim. Insurance company will only cover the balace. You've paid 25000 premium and 25000 deductible, 50k you're spending your pocket only each year.
• Premium goes up each year & No guarantee of continued cover: As long as you are healthy and insurance company doesn't see a big risk in your profile, your policy is renewed, Moment they sense risk increasing (due to age or previous claims), either premium shoot up extensively or you may be denied cover itself. 
• Various add ons cost extra, 
• Terms & Conditions: there're several dozen conditions as to what is covered, to what extent, when etc. Never a blanket coverage that anything happens you're covered.
• High risk of claim rejection and extensive amount of paperwork, follow up drains your time, energy and patience

So what is the solution?

Don't count on insurance, build your own emergency fund

Let us assume a family of 6- Husband, Wife, 2 parents and 2 kids 

Below is the typical insurance spend needed

• 1 Cr Term insurance for Husband and wife: 2500 per month per person or 5000 per month
• 10 Lakhs Health Insurance for 4 people, including 2 senior citizens: 10000 per month (2400 for 2 adults & kids, 7600 for 2 senior citizens- approx values, may vary depending on age, insurance company and other parameters)

Instead of spending 15000 per month on insurance premium (of which 18% goes as GST to govt), invest this monthly in SIP and build a corpus for your family

15000 invested monthly for 30 years at 18% return is almost 21 crore rupees. Inflation adjusted, real value will be around 3.5 to 4 Crore rupees, which is very decent amount compared to 17 lakh we had discussed earlier.

• Car insurance own damage is 1200 INR per month  for a 10 lakh car
• Family is also probably spending 3800 per month on some life insurance products
  

20000 invested monthly for 30 years at 18% return is almost 28 crore rupees

Source: AngelOne SIP Calculator

SWP: At halfway point, say 15 years, you will have a corpus of 1.5 Crores. If your investment is growing 15% annually, you can easily withdraw 10-12% every year without eroding capital. 12% of 1.5 Crore is 18 lakhs/year or 1.5 lakh per month! Enough to cater to various emergency expenses.

Benefits:

• You can withdraw partially at your will at any time for any emergencies, if nothing goes wrong corpus keeps growing and can help you with retirement planning.
• Capital gains tax 12.5% applies on withdrawal, but 125000 per year is exempted, Still better than 18% GST  
• No risk of claim rejection, no complicated paperwork, no copay, no deductible, no detectives investigating if you've put a fraud claim.
• Can be used for anyone (parents, children, self, relatives etc) and no need to maintain specific policy for specific purpose for specific individual
• Capital is intact and will be with you till death. No upper age limit. Can be reinvested elsewhere from time to time depending on market conditions, your needs and discretion.
  

Risk 01: What to do if something big happens in initial few years where your corpus hasn't grown yet-but probablity of dealth or critical illness in early age is very very low. You can either buy insurance only for initial few years or have some funds earmarked for such emergencies 

Risk 02: Investment not giving expected results: Over long term like 4-5 years markets have always given good results. Yes, there could be short term drops. Mutual fund investments may go -ve in initial few years if market is crashing repeatedly. Need to take this risk.

Let me know what you think