Why we buy insurance products?

The first financial product that I bought (around two decades back) was an Aviva ULIP policy. The amount of time I spent in choosing the policy was 10 minutes (to get rid of that agent). The premium amount I was convinced to choose was exhausting my Sec 80 limit (1.2 lakhs per annum) for income tax purpose. The worst part, I was single with no financial responsibilities and barely starting my career. 

This is the classic case of mis-buying (I don't call it mis-selling) simply because I was 
  • Not sure what does investment means
  • Did not understand meaning of "insurance"  
  • Wanted to cover my a**, by saving income tax
Thankfully, I learned, understood and got richer in the personal finance world. I closed my ULIP after two premiums, thus spending 2 lakhs to learn a valuable lesson. Don't "invest" in "insurance".

The key points to understand is, don't buy insurance because 
1. You want to save tax
2. You want to grow your money by investing
3. As a diversification tool
4. To get rid of agent/relative selling the product
5. You are a conservative investor and dont know where to park your money
The only valid reason to buy any product containing the name "insurance" is to ensure that if you die during your working life, your family does not face financial burden. 

Let's keep aside emotions for now and think purely in practical terms. 

Do the following cases cause any financial implications to family if following person dies :

1) If your 2 or 5 years or college going child?
2) Unmarried person with parents still earning?
3) Housewife with no earnings or loans?
4) 65 years old widower with children settled and earning?

If the answer to above question is "No" for all cases, then I still don't understand why people take life insurance policies in the name of their kids or parents, on which there are no dependants. 

The only type of insurance policy you ever need is a TERM policy. It provides the cheapest risk cover. Since any other type of insurance policy whether it is endowment policy, whole-life policy, money-back policy or ULIP, they are combination of (term policy + saving scheme). 

The term-plan component provides the risk-cover and the saving scheme provides the cash value. As a matter of fact the term component is costlier than a stand-alone term policy and the saving scheme gives marginal returns compared to other investment avenues. 

I have heard many a times the argument "If I survive, term plan will return nothing, but other policies will give me back some money!!" This is the most stupid argument you can find. Why it is so difficult to understand that they are giving back your own money with marginal returns and charging you for that? If you have invested that surplus money in an MF over same period, you would have got much more. 

The simple fact is that insurance companies are into a profitable business and hence any premium calculation they do for any policy is going to be more profitable to them rather than the customer. I am yet to see an insurance product that beats the (TERM + MF) combination over the policy period.

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