What comes to your mind when you think of life insurance? A fixed sum assured, a fixed term, an insurance premium equal to the sum assured to be paid throughout the period, and a returnable amount on death or at the end of the policy term, along with a bonus. And unlike non-life insurance, insurance for vehicles including motorcycles or any other property, with a sum assured according to the value of the property and a very small insurance fee compared to the sum assured, and compensation for the value of the loss in the event of financial loss due to an accident.
Common people understand non-life insurance as pure risk-bearing insurance that provides compensation only in the event of damage due to an accident, while in the case of life insurance, it is understood as insurance with savings that also returns the amount with a bonus at the end of the insurance period. Since the sum assured and the bonus are returned along with the risk, this type of insurance premium is high and often the insurance premium is equal to or more than the sum assured. But is life insurance only with savings? Isn’t there a risk-only insurance like property insurance? Of course there is.
Life insurance that bears only risk is ‘term life insurance’. The insurance premium for which is very small compared to the sum insured. Insurance with savings is a sophisticated form of term life insurance. In which the insured is given the added benefit of savings.
Why is term life insurance important?
The basic purpose of insurance is to bear financial risk. While insuring a property, just as the sum insured is equivalent to the financial risk, that is, the financial burden that would be incurred if the property is damaged, human life should also be insured according to the financial risk and the same value should be insured. There are some methods for determining the financial risk of human life. For example, the current value of the amount that a person can earn throughout his life, which is generally considered to be 10 to 15 times the annual income. One popular method of determining the sum insured is the financial risk that the family will bear in the absence of a family member on whom the family is financially dependent, i.e. the amount that the family will need to live for a few years even if he is not there. If the person also has debts or other liabilities, the amount increases further.
No matter which method you look at it, insurance of 10 to 15 times the annual income becomes necessary in a person’s life. Which is possible only with term life insurance. If insurance with a sum insured of 10 to 15 times the annual income is insured, the insurance premium becomes equal to the annual income. Therefore, if any person wants to insure according to his risk, the first option is term life insurance. In case he needs additional savings, he can also add insurance with a fixed amount of savings after having term life insurance.
For example, if a person aged 30-35 has an annual income of 5 lakhs and takes out a term life insurance policy with a sum assured of 5 lakhs for 15 years, his annual insurance premium will be at most 10 to 15 thousand. However, even if he takes out insurance with savings of only 5 lakhs, his annual insurance premium will be more than 30 thousand. According to the current trend of the insurance industry, such a person gives first priority to insurance with savings and takes out insurance with a sum assured of 5 lakhs or less.
If something happens to that person, can his family survive with less than 5 lakhs as he did when he was alive? Absolutely not. If we look at the current inflation, a large part of the cost is spent on running errands. Ultimately, there is no difference between having insurance and not having it. Therefore, when insuring, one should prioritize financial risk and opt for term life insurance. If one has extra money for savings, one can opt for insurance with savings of that amount or a combination of both.
In the above example, one can also purchase term life insurance of 30 to 40 lakhs and opt for life insurance with savings of the remaining amount that can be saved.
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## ##Most of the population is underinsured
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## In a country like Nepal with low purchasing power, people can only allocate a small portion of their income for insurance and savings. In such a situation, while term life insurance should be given importance, only insurance with savings is being sold as insurance and savings in one, and the entire insured has become a victim of underinsured insurance, i.e., a victim of underinsured insurance. While stakeholders are always boasting that such a percentage of the population is underinsured, in reality, most of the insured population has insured for a much lower amount than the risk, which does not seem to make any fundamental difference between having insurance and not having it.
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## ##Why is term life insurance overlooked?
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## When people say life insurance, they usually think of term life insurance. However, for years, savings-oriented insurance policies have been branded in such a way that the general public has been led to believe that life insurance is life insurance with savings, just as cold is Coca-Cola.
If we leave aside the foreign term life insurance made mandatory by the government for those going for foreign employment and the term life insurance equivalent to the loan amount that is mandatory to protect the loans provided by microfinance, the share of term life insurance in the insurance premiums collected by insurance companies is found to be zero. Even though every life company has term life insurance, it is not seen by the agent.
Are agents and insurance companies reluctant to take term insurance?
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## If we look at the sales channel of the Nepali life insurance market, more than 95 percent of the market share is occupied by insurance agents. Whether it is term or savings insurance, the agent is in a position to convince the public to buy insurance after understanding the insurance. Since the insurance agent is also the financial advisor of the insured, it is also his responsibility to provide the insured with the insurance that is suitable for him. However, the situation is exactly the opposite. The commission received by the insurance agent is a certain percentage of the insurance premium paid by the insured, so instead of spending the same effort on explaining term life insurance to the general public, the agent gets more commission by understanding and selling insurance with savings with a higher insurance premium, so they do not seem willing to sell insurance like term life insurance, let alone provide information about it to the insured. Although insurance agents declare themselves to be the carriers of insurance awareness among the general public, their main focus is on strategically selling insurance policies, focusing on their commission, incentives, and MDRT targets, rather than informing customers about the type of insurance they need. As a result, no agent discusses term life insurance with low premiums that are actually suitable for the insured.
In addition, insurance companies are not seen to be giving much encouragement to agents and employees in term insurance policies. Except for a few companies, the race of life insurance companies in Nepal is only to collect insurance premiums, which is of course obtained from insurance with savings. Insurance companies seem to have moved forward on the principle that the more insurance premiums are collected, the more profit. The standard for comparing insurance companies seems to be whose insurance premium is higher. The media has also emphasized the same thing. However, those who have been running companies for years should definitely know that higher insurance premiums do not mean higher profits. The profit of savings insurance is basically based on the return on investment, while the main profit of risk-only insurance is from underwriting profit. At least 90 percent of the profit of savings insurance has to be given to the insured as a bonus, while in the case of term life insurance, 100 percent of the profit belongs to the company. Therefore, any company can earn more profit from term life insurance by charging less insurance premiums, if it has correct risk assessment, adequate strategic reinsurance, and maintains agility in company operations, than a company that charges high insurance premiums by focusing only on insurance premiums. Moreover, in a situation where interest rates are so volatile, it seems that life insurance companies should focus on term life insurance rather than on investment-based profits, but Nepali life insurance companies do not seem to be thinking about it.
In this way, by neglecting term life insurance and selling insurance with a very low premium compared to the need, the general public has an incomplete understanding of insurance. As a result, the general public is increasingly skeptical of the agents and the entire insurance sector.
If the energy spent on promoting term insurance policies for years had been invested in insurance like term life insurance, would customers really understand life insurance and be willing to buy insurance on their own? Would they have realized that insurance is for everyone? Wouldn’t people wrinkle their noses at the mention of the life insurance industry and insurance agents? Could the government, which has made life insurance mandatory for foreign employment and vehicles, have made life insurance mandatory as well?
