The uncertain certainty

`Knock, knock.' `Who's there?' `Opportunity.' The children's game takes a twist here. `Can't be.' `Why?' 'Because opportunity never knocks twice!'

Like opportunity, catastrophe, too, never knocks twice. In fact, it does not even knock once. It is for guarding oneself against eventualities such as death, sickness, disability, accident, robbery and theft that insurance policies are bought. Often enough, these policies come with freebies such as income tax rebate.

The middle-class can ignore life and disability insurance only at its own peril. As a breadwinner, the greatest harm that you can do to your family is to die without insuring yourself.

Life insurance has three attractive facets -- it is an investment, a safeguard against the impact of disasters and a tax-savings device. The average investor often relies excessively on only one of these features. We have to be on guard against this mistake, one of the several an investor may commit.

Life insurance is sold as a shield against disaster, but Indians have viewed it as an instrument of investment. While it is indeed a form of compulsory thrift, from the investment angle, insurance fails to score, even after taking the bonuses into account.

For instance, an endowment policy for Rs. 10 lakh for 21 years costs a 25-year-old man an annual premium of about Rs. 50,000. If invested at a reasonable return of six per cent, Rs. 50,000 a year would grow to over Rs. 18 lakh in the same span.

People buy insurance policies `because a part of the premium is borne by the Government'. Yes, they are right. The tax rebate is a subsidy on the premium. However, policy changes, made over the years, in the way the exemption/rebate is calculated have upset the economics of this approach.

Does it mean that one should give up the idea of life insurance altogether? Not in the least. Insure your life you must.

Your focus must be on protection against disaster and it makes much more economic sense to take a term insurance policy at a very low rate -- a non-refundable premium of about Rs. 2,000 per year for a cover of Rs. 10 lakh, and save the remainder in instruments that fetch handsome returns, if you have the financial discipline, that is.


Illustration: Manoj