Life Insurance and it’s four myths

Myths are created by some of the special class of people in society called ‘Knowledgeable People’ who does not know anything but ‘know everything’. These are the people who are so confident in their statements that even a well-educated person believe them and follow them. They are also called ‘Gyani Baba’. Interestingly, for whatever problems they give solutions, in their own life, the same problems are unsolved. You will find these ‘Gyani Babas’ everywhere like waiting halls of railway or bus stand, as co-passengers and even at the doctor’s clinic. They are present everywhere with their opinions which is actually not solicited.

The most interesting incident has happened in front of me and I was shocked to see the influence of one person on the family members of the patient, recovering from some critical illness at home. The day he got discharged from hospital many friends and relatives came to see and wish him for his speedy recovery. Everyone was sharing their own experiences of illnesses and try to highlight how smartly they had doubts about the doctor’s capabilities and the doctor not only admired but followed their suggestions. Some of them were so confident in saying that they helped the doctor to diagnose the disease and suggested a particular medicine to prescribe. There was a Gyani Baba here also who was very busy in checking all the prescriptions, pathological reports, and hospital bills. He is suddenly pointing out that when he was admitted for the same illness, he was given a particular medicine and that worked like a miracle he also confirmed that some other patients were also prescribed the same medicine. But in this case, perhaps the doctor has forgotten to prescribe that medicine. Everyone was very much worried now. Finally, they decided to call the doctor and ask why he has not prescribed that medicine. The doctor was very irritated on the other side of the phone and said that the medicine they are asking about cannot be prescribed to a diabetic person. Even after that the person called others to confirm about this and was showing off that the poor doctor may still be wrong. I hope you must also have faced such situation.

Life insurance is also making the most un-respected topic of our life, due to these kinds of very knowledgeable people in society who know nothing about the role and importance of a Life Insurance Plan in our life.

In this article, we would highlight some of the myths and the real facts related to Life Insurance Plans.

1.Life insurance is not for younger ones:

It is generally said that life insurance is only needed when you become old. A young person does not need it. We don’t like to think about the death of a young person. It is actually very unpleasant. But there is no guarantee of life and if something happens to the person of young age who have small kids, the young wife, and dependent parents then the situation is too bad to imagine. Therefore, life insurance is more important at a younger age because the liabilities are more with the longer time span. Any mishappening with such young earning member of the family can lead to a very difficult time for all the family members. So, he must take a life insurance policy to take care of all the future financial needs in case something unfortunate happens to him. Most importantly, the premium for a young age person is very low in comparison to a higher age person. If a person of age around 30 years takes a policy for the term of 20 years he has to pay 10% lesser premium every year than a person of age more than 45 years for the same maturity amount. So it is very important for young people to take a life insurance policy for better returns and more risk coverage for the future financial protection for all the dependents.

2.What if the company closes down:

This thought comes to anyone’s mind because of the bad experiences of others who are cheated by the Ponzi schemes. It is said that customers buy anything out of greed of having extraordinary returns. This is very common in semi-urban and rural areas where the awareness level is not so high and people easily fall prey to fraudsters and their fabricated false assurances of high return. They especially target the plans of private life insurance companies. They easily convince rural customers and create many doubts such as a private life insurance company can become bankrupt and run away with all their money. However, the fact is completely different. First of all, it is not easy to open a Life insurance company because it requires IRDA approval with certain criteria like; Minimum capital required is 100Cr and a proven track record of at least five years with profit. Secondly, for all the liabilities the insurance company has to keep minimum 150% of solvency margin with IRDA. Suppose an insurance company insured Rs.1, 000, then they have to keep aside Rs.1, 500 with IRDA as a solvency margin. This is nothing but a cash reserve an insurance company has to keep with IRDA in case of any emergency arises and the company is unable to make timely payment. A higher solvency margin indicates that the company is better in paying off its liabilities. So, investing in any plan of any insurance company only gives you the guarantee of better financial conditions and there is no fear of the company going bankrupt or closing down its operations. But before investing, you must check and ensure whether the plan is suitable for your requirements or not.

3.It is only for life cover not for saving:

I have heard many well-informed individuals saying that Life insurance plans are good for coverage only and not so good for saving. I am not sure about your thinking because, like all other myths, this is also a result of the influence of Gyani Babas. Another interesting fact about investment and return is that the customers want a very high return of a small amount within a short time period. Life insurance plans are the very important financial tool for your long-term goals like, child education, child marriage, building your own house, wealth creation, wealth protection and for the pension after retirement. By investing a major portion of your earnings in Life Insurance plans with saving element in it, you are not only protecting your family, but you are saving and protecting your hard earned money for all your future financial needs. The Life Insurance plans have a unique feature of capital protection along with a growth element which is regulated by IRDA. This keeps your money growing with no risk of loss due to market going down or the interest rates going down. Your money is available to you when you need it. You should not think and calculate about the percentage of return because these plans not only have direct returns but also have indirect benefits like tax benefits at the time of investment and tax-free income at the time of maturity. Therefore, we should not have any doubts about the saving element of Life Insurance Plans.

4.The Insurance company does not want to pay the death claims:

I heard someone very positively saying that he actually wanted to take an insurance policy because every employee of the company will pray for his long life till maturity of the policy because if he dies in between the insurance company will have to pay the death claim which is a big loss to the company and to avoid this loss company have only two ways, first that company should pray for long life of the life assured and, second that they should look for the reasons to deny claims.

This is one of the biggest myths about Life insurance that company does not want to pay the death claim amount. A claim is a promise made by the company to pay the assured sum of money when things go wrong. Every insurance company is very much willing to pay the claims especially death claims because every paid claim establishes the concept of insurance which is a very important aspect of the insurance market. Paying death claim is a very important occasion for a life insurance company, you may also have seen that at the time of paying claims many higher officials are present to hand over the cheque to the family.

Another big knowledge shared by Gyani Babas is that ‘Insurance companies will be in loss’ if they pay many death claims. However, this is the most important part of Insurance, Claim is the end product of any insurance Plan and it involves a very complex mathematical calculation, by this calculation insurance company technically knows about how many claims will come to them on a particular timescale. This calculation is done by the experts and these experts are called ‘Actuaries’. Actuaries are the most sought-after technical experts in the insurance industry, they are highly skilled in mathematics, economics, finance, business, and computers. With the help of actuaries, a company knows exactly about the number of death claims they will have to pay and the premium (which is actually the cost of the Policy) of the policy is calculated and fixed accordingly. Therefore, the claims do not incur any extra cost to the company and the company does not at all hesitate to pay the death claim.

I am sure that above-mentioned myths are not the only myths but there are many more. However, we tried to make sure that these are not at all now myths for you and you should feel confident in such an important financial tool which protects your family even if you are not there.

Happy Investing…


Anand Kumar
Insurance Expert

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