Life Insurance is often misunderstood as a means of saving and compared with other general saving instruments. Often it is thought of as an instrument of saving tax. And of some would have thought of it as the most important instrument covering the Risk of life and protecting the family financially from unforeseen happenings to the bread earner of the family. It is often seen that many experienced analysts commit the simple mistake while comparing the return from Life Insurance saving with other financial instruments which are purely investment instruments with very high degree of investment risks without any life cover. In any analysis if one covers the value risks that is provided by a life insurance company, the net return of insurance investing will be much higher than any type of investment instrument.

Dealing with Uncertainty
'Life Insurance' and 'risk coverage' is a general statement which means covering the unpredictable risk of death and making up for the financial loss which the family might suffer due to the sudden death of the breadwinner or any member of the family. In the recent times the meaning has been expanded to cover savings also in the form of provision for the future events. Insurance is a risk transfer mechanism by which an individual can exchange his uncertainty to certainty. The cost of covering this risk is spread over a period of years and also to a large number of people, making insurance an affordable alternative to other viable forms of risk coverage.

Life Insurance is necessary so as to protect his income and save for family so that whenever death or any untoward incident occurs, the income for his family should not stop i.e. alongwith an individual's sudden loss, the family should not suffer financial loss also.

Life Insurance and Human Life Value
Human life is invaluable and, hence a precise value can never be put for a human life. Life insurance not only covers this unpredictable risk and promotes thrift but has also tried to give an approximate Human Life Value (HLV). Human value in terms of insurance is the net worth or value, which he has for his family and the income he provides for the family. It is calculated by deducting the personal expenses of the individual including the taxes and the value is laid on the balance of his income and expenses i.e. the expenses for immediate and future needs of the family members and the current and future savings he is likely to make from the remaining years of service.

Unlike other savings life insurance creates an immediate asset at the inception itself to take care of the family needs in case of death of the individual. For eg. Investment in shares - has an ever fluctuating value and immediate realization of its value in times of emergency is time consuming and not always profitable than the real value of the investment. Investment in other places like Banks, Provident Fund or Deposit linked schemes, the returns are available after a fixed duration and not when the need of the family arises and also the interests vary according to the prevailing interest rates. Life Insurance gives fixed returns irrespective of any changes. But the main feature is insuring human life and savings and other returns are the additional features.

The most significant contribution of Life Insurance can seen not in terms of Bonus and Maturity Benefits but in terms Death benefits, particularly the benefits provided by LIC towards Early Death Claims.

Data in the Appendix 1 provides an indication of the extent of the financial risks covered by LIC in case of untimely death of policy holders. During the year 2002-03, 347,790 death claims paid for an amount of Rs 21.2 bn. Out of 347,790 claims, 92,369 claims were early death claims where death occurred within two years of taking the policy.

Tax Benefits
In recent times, the tax benefit has become an important attraction for taking Life Insurance Policy. Here also Life Insurance scores over other savings / investment instruments. The premium paid for Life Insurance policies receives similar or more advantageous income-tax rebates as compared to the other savings. Thus Life Insurance is not only on par with the other forms of savings in all respects but also a step ahead.

Product market Flexibility
In respect of life insurance the initial contribution is very less and spread over many years for a larger return with bonuses and additions unlike many of the other savings where the initial contribution itself is high.

Life Insurance covers your liabilities. For eg. when a housing loan is taken through life insurance policies and if death occurs, the family does not have to incur repayment of this liability as it automatically gets repaid through the policy moneys. It also ensures that in case of untimely death, the family is not burdened with large unpaid debts.

Life Insurance can also be said to be compulsory saving as in the case of policies taken under Salary Savings Schemes. The premium is deducted from the salary every month like a normal and regular deduction before an individual gets his net income. In this way the saving is made without his feeling the pinch of shelling out money from his pocket or compulsorily.

Life Insurance unlike any other savings has been designed to meet the various individual needs along with coverage of risk. There is no other saving which meets so many diverse hazardous needs of family. The policies are based on the life cycle of the individual. For eg. In the initial years where income is less Term Assurance is preferred, later when his income is regular - Endowment and Money back policies are preferred, and later on various policies to meet different needs with higher income and lastly pension policies after retirement.

Managing Needs Human Life
The following are the different types of policies designed to meet the different needs of the individuals:

• Provision for Marriage of children and Provision of funds for children's education when the time arises.
   

• Availability of loans at reasonable interest rates and premium as well as repaying liability covered.
   

• Providing income if an individual becomes handicapped based on some terms and conditions.
   

• Provision of pension policies after retirement (as per the individual needs.)
   

• Provision of Group Insurance for different types of groups at very low premium and without many requirements.
   

• Asset Management of an employer by providing Group Gratuity Schemes.
   

• S.S.S. policies for compulsory savings as well as for convenience of the policyholders.
   

• Schemes and policies for the rural and agricultural labour.
   

• Employee Deposit Linked Insurance - which has double feature of deposit related advantages and also risk coverage.
   

• Policies being issued under Married Women's Property Act thereby creating an asset for the family, which the creditors cannot lay hands on in case of bankruptcy.
   

• Policies especially for the Hindu Undivided Family (these are not operational these days).
   

• Various plans for females and children. Since death of a female member can also cause loss for the family in a different way.
   

• Key-man Insurance to protect the employer from large losses which can arise due to the key man's death, resignation etc.
   

• Partnership policies which can make good the loss which can incur due to the death of any one partner.
   

• Polices to provide financial assistance in case a person is affected by major/dreaded diseases.

  Life Insurance Contribution to National Economy
  Apart from the above, the premium we pay towards our policies are used for the economic and social developmental activities of our nation, hence when we insure to secure our future we are also contributing to the greater cause of the nation building.

  LIC has been playing a significant role in the economic development of the country by contributing to various five year plans, which has gone up from Rs 1.8 bn during the First Five Year Plan (1956-1961) to Rs 1,709 bn during the Ninth Five Year Plan (1997-2002)

  In addition, life insurance brings about a positive personality and a secure feeling in an individual and this ultimately leads to the upliftment of the individual and his family. Thus life insurance can be said to be a necessity like food, shelter and clothes.

  In fact, Life Insurance is an absolutely necessary for improving the quality of life of an individual as well as for the nation and encourage entrepreneurial/ risk taking attribute of people.

  By S B Mathur, Chairman, LIC of India

  This article forms a part of "Money Simplified – Life insurance: Hear it from the experts", a free-to-download online guide from Personalfn. To download the entire guide, please click here.

  Also read, "How Much Insurance Do You Need - by Shivaji Dham, Managing Director Om Kotak Life Insurance"

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