| Manju Narula with kids |
Age: 36
Occupation: Homemaker
Insurance cover: Rs 4 lakh
Annual premium: Rs 50,000
|
The whole idea of life insurance, as we have repeated time and again, is to ensure that your dependents do not suffer financially in case of your untimely death. Which is fine as long as you’re earning. But what if you’ve opted out of the workforce and chosen to stay home and look after the family? Do you still need insurance? Assuming you do, how do insurance companies calculate the value of the work that you are doing for free? Most non-earners take life insurance more as an instrument of disciplined saving than as cover for dependents. Manju Narula, for instance, says life insurance is “a kind of forced savings.
I know that even if there’s a mishap, my children will be looked after financially. But the money saved by me through insurance will be of some help to them. If I survive the term, I will get the money, which I can utilise.” Narula has a Rs 4 lakh plan from ICICI Prudential Life Insurance, for which she pays Rs 50,000 a year as premium. Insurance companies see the value in what people like Narula are saying. Sanjay Jain, head, marketing, Bajaj Allianz Life Insurance, adds: “For homemakers, life insurance is an investment and savings avenue, which would grow over time, while providing added risk cover.”
This is why insurance companies usually offer non-earners plans that are investment oriented rather than pure risk cover. “There is no restriction as such, but pure risk plans will not meet their requirement. As they are not earning, there is no question of replacing income in case of their death. The other plans are more beneficial as they have a savings and life insurance component in them,” says Kalpana Sampat, chief, underwriting and claims, ICICI Prudential Life Insurance.
However, financial planners believe that if a non-earner must take insurance, given the economic value of the person being insured, a term plan makes more sense. “I don’t recommend insurance for homemakers, but if someone insists, I suggest a term plan, which companies generally refuse,” says Kartik Jhaveri, a Mumbai-based financial planner.
There’s logic on both sides, but insurance companies are concerned with more than just the claims that could be made. “If a proposal for a huge cover [for a nonearner] comes to us, we look at it with great detail as there is a possibility of moral hazard involved,” says Sampat. That’s why insurance companies hedge their offerings to non-earners with several conditions and restrictions.
Replacement value of a homemaker
|
Cost Heads
| Cost/Month (Rs)
|
Cook
| 1,000
|
Home manager
| 2,000
|
Tutor
| 1,000
|
Caretaker for kids
| 2,000
|
| Total cost | 6,000
|
Total cost/year
| 72,000
|
Number of years of service
| 30
|
Inflation per year
| 5%
|
Rate of growth of cost/per year
| 5%
|
PRESENT VALUE (in Rs)
| 25,10,274
|
Costs and years of service are illustrative;for ease of calculation, the cost is simply multiplied on an annual basis and cost escalations are taken only on a yearly basis
|
For instance, most companies insist that the earning member (generally the husband) take a life cover. Some, like Bajaj Allianz Life Insurance, tie the nonearner’s policy to this. So, if the cover is for a non-earning wife, it cannot be more than half the value of her husband’s life cover, subject to a maximum of Rs 25 lakh. The company also offers insurance of up to Rs 2 lakh to non-earners without this restriction. ICICI Prudential Life Insurance offers a higher limit of Rs 5 lakh, after which it will insist on a cover for the earning member.
Rajesh Dalmia, a Kolkata-based financial planner, says: “A homemaker’s effort has some monetary value. Therefore, she also requires life insurance.” But how is this value calculated? Economists generally use one of two ways to calculate the economic value of a homemaker (as they form a large part of the universe of non-earning adults). One method calculates the value based on “opportunity cost”. This assumes that a homemaker had quit a paying job to stay home.
So, if an advertising executive who earned, say, Rs 300 per hour, stops working, then her work in the home is valued at Rs 300 per hour. Of course, this method poses innumerable problems to those who have never held a paying job. To answer these problems, economists came up with the concept of “replacement value”. Here (see table Replacement Value of a Homemaker), economic value is derived by putting a cost on the various functions a homemaker performs.
There are problems with this approach, as it is quite arbitrary in the way it measures time devoted to household services and also does not take into account services that are not available in the market. But once this value is calculated, it will become easy for insurance companies to offer customised plans.
A few insurance companies also offer life cover to students. Financial planners believe that this cover is unnecessary, but Rahul Aggarwal, CEO Optima Insurance, says: “Parents spend huge amounts on their children’s education in the expectation that, after becoming financially independent, the child will take care of them monetarily. If the student dies, the parents can at least recover some portion of the education costs.”
