Hybrid Life Insurance Products Can Lead to the Risk of Being Under-Insured

Today insurance advertisements abound with attractive offers. Life insurance companies are luring customers with many policies like money back, endowment, Unit-Linked Insurance Plans (ULIPs) etc. But are they really helpful? Afraid not.

Many people often get carried away by policies that offer cash back after the maturity period. They assume that it is a good investment option – think that it offers both insurance as well as investment. Beware and be aware of the risk of being under insured! Combined with savings, insurance becomes under-insurance.

What is under insurance?
Under insurance is a situation when your insurance policy may not be able to cover financial needs of your family. If you take a hybrid policy, you tend to certainly lose out the required protection as you take less insurance than you should. Hybrid policies take care of partial financial needs only due to higher premiums on such policies. It’s like less money in pocket for emergency situations. For example: You had dinner with family in a restaurant and you have only 40% of the bill amount with you. Doesn’t it put your family in embarrassing situation?

It is just an example, what if it happens with your family when you are not around to take care of them. The money which your dependents get in the event of your death will not be enough for their long-term future expenses making them extremely vulnerable.

Your family may have to compromise on various essential things to make ends meet. Your kids will not be able to pay school/college fee in good institutions. Your spouse and old parents may be forced to work to meet their basic financial needs. Thus, the unfortunate death of a bread winner of a family – who is under insured, will bring a drastic change in the lifestyle of a family.

Hybrid policy – not Suitable for middle-class group
Not only the assured insurance amount is less, it is also painful for you to pay the premiums. High premiums may eat into your monthly salary or strain your finances. You may have to compromise a lot of things due to the high premium rates of the hybrid policies. You may not be able to purchase functional items which you need most, as most part of your spending will go into paying the premiums.

The following table shows the excess amount that you will put when you take hybrid policy instead of term policy. As a thumb rule, life insurance should cover 7 times of your annual salary.
* Insurance amount is taken as 7 times the annual salary
* Premium prices are for a 25 year old person
* Numbers are approximate

Financial strain every month
In the above table, the insurance needs of people with different salaries are shown. If you are earning Rs.20,000 per month, the amount of insurance needed for you will be between 15-16 lakhs (7 times annual income). If you take hybrid policy instead of term insurance (which costs around Rs. 2,389 per year), you have to pay premium of Rs.60,849 per year. Every month you should pay more than Rs.5,000 for a hybrid policy, whereas for a term policy you will pay around Rs.200 only. Thus, you need to pay Rs.4,800 more per month to get the same life insurance coverage with a hybrid policy.

You will be forced to take less insurance cover
As premium rates are high for hybrid policies, many times, people take less insurance coverage. If you are earning Rs.30,000/month, you should take an insurance cover of 25 lakh, but with high premium rates, you need to pay around Rs.8,500/month. You will think that it is a substantial portion of your income and you will certainly go for less insurance where you agree to pay around Rs.5,000 per month. Thus, you will be under-insured and put your family at risk.

No money back for first few years
Without proper planning you may opt for hybrid policies. But when it comes to paying the premium, you will struggle. You could not able to pay the promised amount every month. If you discontinue your policy in the early years, you will not get anything back. Your big premiums will be lost, if you surrender/stop paying in the initial 1-3 years of taking policy. For example: In money back policies of LIC, you will not get your money back if you discontinue/surrender your policy before 3 years.

Due to the high costs of insurance with hybrid plans, many people discontinue the coverage after a few years, as it squeezes their monthly budget. Then they give break, putting their family at risk. Some people may take another insurance policy after one or two years. Typically, they take the hybrid insurance plan again (money back policies) and repeat the cycle. The entire process continually puts the family at risk of under insurance and no insurance while fattening the pockets of the insurance agents.

Agent eating your premiums
In money back policies, insurance agent will get 40% of commission in 1st year, 7.5% commission in 2nd Year, and 5% for the remaining years in India. But, while in case of term plan, the commission is limited to 2%. Thus, your premiums are pocketed on commissions by your agent in hybrid policies. That is the reason you will see your agent asking you to continue at least for three years.

Term insurance is the best option when the purpose is life cover. It gives maximum protection at low cost. Life insurance and investments are different needs. Adequate insurance cover is essential for meeting your family needs and responsibilities. So, having an insurance cover is not enough – having an adequate cover is essential.

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2 comments on “Hybrid Life Insurance Products Can Lead to the Risk of Being Under-Insured”

  1. Thanks for providing insightful article. This article is an eye opening for insurance buyers!

  2. Valuable information.