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Why Life Insurance Policies need to be made Mandatory

Maduwanthan Madhav Kumar L R

Indian Institute of Management, Rohtak

Critical Thinking and Writing Skills - II

Dr. Mary An Malimas

April 17, 2022

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The second-most respected profession after Physician is an Insurer. A person who has an

economic and insurable interest in another person receives financial compensation from the

insurer upon the tragedy caused by one of the foreseen risks specified in the insurance contract.

(Smith, 2021). Vehicles are mandated to be insured against perils worldwide through Auto

Insurance. Yet, the same argument has not been extended for ‘People.’ Thus, every family needs

to be mandated to take up a life insurance policy against at least one of its earning members to

minimize the financial loss caused by their death(s).

Around 988 million Indians or 75% of the Indian population is not insured. Moreover,

only 8% of the finance required to protect a family from financial shock following the death of

an earning member is available to them. (IndiaSpend, 2019). This is an alarming issue as it

means that families lose a significant portion of their income required for survival upon the death

of an earning member. The Sum Assured (SA) is usually 20 times the gross annual income of the

individual whose life gets covered. (Soneji, 2007). The money handed over to the family

members upon the death of the insured person would minimize their financial loss. Apart from

financial protection, there are other benefits of taking Life Insurance policies. Many people

worry about their premiums going waste in case of no event of death. These individuals can opt

for a Fixed Term Insurance plan or an Endowment plan, where they would be entitled to receive

periodic income post-retirement to support their financial needs. The earned income can be

channelized into alternative savings instruments such as Post Office Schemes, Shares (Equity),

Bonds, Fixed Deposits, etc. Hence, if the insured person does not pass away within the specified

time period, they get back the premium they paid. Conventionally, their nominees would receive

the sum assured if they decease before the scheme matures. The table below outlines different

term plans that provide returns upon maturity or death, whichever occurs first.
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Term Insurance Plans. (2020). [Table].

The popular misconception against Life Insurance policies is that insurance companies

are businesses that aim at maximizing profits, and their primary reaction to the demand of a

claim would be “rejection.” However, if the client discloses all medically relevant facts about

oneself to the insurer, such as health hazards, medications, medical history, work details, etc.,

when taking the policy (uberrimae-fedei), the chances of getting the claim rejected narrow down

to zero. (Investopedia, 2022). Likewise, if premiums are too costly and unaffordable, prospective

customers would prefer to channel their money into other instruments that would provide higher

returns than insurance plans. The argument is logically flawed as an early death would lead to

lesser financial savings. In addition, the main motive behind taking up an insurance plan should

be to reduce financial losses and not to maximize profits. Thus, insurance handles the uncertainty

associated with death and considers the associated time period. The nominees would be paid the

entire sum assured even if the premium of only a few terms has been paid under the insurance

policy.

Thus, every individual must be mandated to take up at least one life insurance policy to

cover their death. A careful assessment of every scheme must be done before deciding. The

money allocated for insurance should yield good returns, even if there is no event of death in the
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specified period in the contract. The material facts about the client’s medical history need to be

disclosed to the insurer while signing the contract as that affects the premium rates and avoids

rejection of claims. Hence, while the returns generated in the long run by other savings channels

may be higher, Life Insurance plans cover the uncertainty related to death, thereby minimizing

the financial loss for the family members.

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References

IndiaSpend, R. D. A. S. A. |. (2019, January 15). With 75% grossly underinsured, why arent

Indians sufficiently covered? Www.Business-Standard.Com.

https://www.business-standard.com/article/current-affairs/with-75-grossly-underinsured-

why-aren-t-indians-sufficiently-covered-119011500150_1.html

Smith, A. (2021). The Principle of Life Insurance. Sapling.

https://www.sapling.com/8134406/principle-life-insurance

Soneji, H. (2007, August 23). Insurance cover should be 20 times one’s current income. The

Economic Times.

https://economictimes.indiatimes.com/opinion/interviews/insurance-cover-should-be-20-

times-ones-current-income/articleshow/2305507.cms?from=mdr

Term Insurance Plans. (2020). [Table].

https://www.relakhs.com/best-online-term-insurance-plans-india/

Uberrimae Fidei Contract Definition. (2022, February 25). Investopedia.

https://www.investopedia.com/terms/u/uberrimae-fidei-contract.asp#:

%7E:text=Uberrimae%20Fidei%20Contracts-,Uberrimae%20fidei%20or

%20%22uberrima%20fides%22%20literally%20means%20%22utmost%20good,or

%20risks%20to%20their%20counterparties.
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Plagiarism Report