Why insurance is mandatory for motor vehicles?

Motor vehicle insurance has been made mandatory as Common Law provides right to every citizen to conduct in such a manner so that other persons rights are not infringed while using roads where public has access, to their detriment.

If a vehicle is being used in a public place in a careless and negligent manner causing accidental injuries or death to a Third party using road ( the third party is a person out side the vehicle, some persons on vehicle have been mandatory included like passengers using vehicle for hire or reward; driver, conductor, labour necessarily required on vehicle; owner of goods or his representative travelling on goods carrying vehicle ); the person causing injury or property damage of third party will be legally liable to compensate that third party adequately. 

The Motor Vehicle Act 1988; Sec 146 mandates that no person will drive or cause other person to drive a motor vehicle in a public place or a place where public has access on a private property with out a valid third party insurance cover which in India is a unlimited liability cover; so that the third party in case of disability or his legal heirs in case of death are compensated adequately to the extent of the financial status maintained by the deceased in the society.

Driver, cleaner, conductor, labour on vehicle, owner of good or his representative are not third party technically, as they are using vehicle on their own; but law separately provides compensation for them too.

Motor insurance covers legal liability of Registered owner of vehicle by virtue of ‘Certificate of Insurance’ issued by Insurer in compliance to Motor Vehicle Act 1988.

Currently Motor Insurance also covers “No Fault liability” as a humanitarian good will gesture, adjusting the amount so released as interim payment, in final liability compensation awarded by MACT to mitigate immediate need of deceased’s family.

It is estimated that on an average, in one hour, around 55 road accidents occur in our country. What if the cost is too high to be borne by one person? Who will take the responsibility for the damage?

This is where motor insurance comes into the picture. Those who have a valid insurance policy can approach their insurer. The insurer will pay for the damage. However, no one will cover the people who do not buy insurance. And if they cause an accident, they will have to bear the cost from their pocket and their own expenses.

Apart from paying for the damage and medical treatments for injuries, the drivers at fault could face serious legal liabilities. This is exactly why it is a law in India to buy Motor Insurance. Under Chapter 11 (Section 145 to 164) of The Motor Vehicles Act, 1988, it is compulsory to buy at least a Third-party Motor Insurance Policy in India.

Advantages of Buying Motor Insurance

There are two types of Motor insurance policies, Third-party Motor Insurance and Comprehensive Motor Insurance. As mentioned earlier, a third-party policy is compulsory for every motor owner. However, it does not provide adequate coverage to the owners themselves.

Coverage

Depending on the type of coverage, you can get a vehicle insurance online policy which will insure you for damages caused to the third-party and for own damage. Own damage includes cost of treating injuries of owner-driver and cost of repairing damages.

No Claim Bonus

During an active policy year if no claim has been raised, you will be entitled for a No Claim Bonus i.e. a discount on the amount of motor insurance premium.

Peace of Mind

Motor insurance offers complete peace of mind. One does not have to worry about a sudden financial crunch which may occur if the motor is stolen or damaged.

Hope that helps!!

Which is better and why: term or whole life insurance?

 Look at the beauty of marketing by insurance companies. They can cherry pick words & make lousy products look beautiful. And these things sell also ! It is a wonder.

The difference between term insurance & whole life insurance is this :

One is Good , the other ranges from Bad to Ugly.

We shall come to the marketing later. Let us see this through the definitions first so that you get it in simple terms.

Term insurance is a fixed term contract between you & the company. So you enter into the policy at say 30 years & agree to pay a fixed premium per year for next 30 years (mostly flat per year).

Why do you pay ? If something unfortunate happens to you, your family gets the “sum assured” amount immediately on which they can sustain till the time the children become independent. Typical sum assured should be between 10 to 14 times your annual income. In mature markets like US, this multiple can be as high as 20 or 25% at very reasonable cost. So it’s simple. You pay for the risk of eventuality & know what your risk cover amount is. If you survive till 60, good for you. The contract ends. The policy gives you the peace of mind while you are earning without spending too much out of your savings(for premiums). That’s all you need for your dependents in your earning years. Right ? This is the GOOD product.

Now let's move to the whole life insurance also sold as permanent life insurance.

This is a category which has various forms (variable, universal and variable universal). It also takes the form of endowment plan, money back insurance, traditional plan, etc.

Notice the attractive use of catch phrases like “permanent” , “whole life” & “moneyback” v/s the very non glamourous “term insurance”.

These plans are nothing but savings plans mixed with insurance, complexity , high costs & commissions that are peddled through agents with aggressive (mis) selling & poor transparency. Obviously, who will buy the moment you show the product all open & make it simple to understand ?

All traditional/whole life/ Endowment plans are heady cocktails that are difficult to understand, very expensive & will give you a heavy hangover when you wake up after your “whole life” is in later phases & you need money the most.

And there is this marketing blitz. Lets us see how insurance companies market the bad & ugly with smarter words that beat logic.

The BAD & the UGLY explained:

Here are the selling propositions of whole life plans & the absurdity of logic explained from my perspective:

The Gimmick : Whole life insurance is a type of permanent life insurance, which stays in effect for as long as you pay the premiums. This means you never have to worry about un-insurability or losing your safety net as you get older.

The absurdity: You are collecting my money. Of course it is permanent as long as I pay. Why would you stop me? My money is income for you. Plus the “risk cover” in case of eventuality is very low, approx. 5% to 10% of what you get in term plans.

The Gimmick : How exactly the cash value works depends on the type of policy. For example, in a variable life policy, the cash value acts like a mutual fund, but, with whole life, it’s more similar to a simple savings account.

The absurdity: So you won’t tell me the details of charges & high expenses. “Depends” is the best I get. Mutual fund is thrown in to keep my imagination flying on returns but the “depends” eventually will kill me with the returns of a simple savings accounts with lots of costs, expenses & commissions deducted. Huh !

The Gimmick: Which plan would you pick from the table below?

Obviously the second plan is for “whole life”, has “guaranteed cash value” & earns interest. It is so obvious ! SOLD.

The absurdity: I need you to cover my risk with “high sum assured” for my family to survive on. Don’t open another savings account for me with poor risk cover. Guaranteed death benefit ? Amazing. I have deposited money all along. Of course, you will give me some part of my money back to my family. After deducting your profits & costs. Earns a predetermined interest ? I can get interest from a term deposit also at the bank. At least that will not have your expenses baked in. I need insurance to cover my life risk & provide me a peace of mind at low cost. Why the complexity ?

But why do these plans sell after all?

Because Insurance is never bought. It is always SOLD.

Never underestimate the selling authority of a person who is “known” to you, sitting face to face , motivated by high commission trails 7 is talking to people with limited financial literacy(that covers all of those who buy such plans).

Why do people buy LIC Policy when the returns are so bad?

Why do people buy LIC Policy when the returns are so bad?

Great question with even interesting answer. It could save you a fortune in life, if you understand the spirit behind this answer. Here is what I would say:

1. Notion of implied govt guarantee: People in India tend to believe that LIC has an implied govt guarantee. Most Indians looking for safety of their money, think LIC is the best for them. It is like saying that your money is safer in SBI & not in private banks !! Really ? So the safety seekers are more likely to invest in LIC, even though the returns are very average in most LIC endowment based plans. If you are happy with 4% odd kind of returns, all the best to you.
2. Indian custom to buy LIC, passed through generations: LIC has the most entrenched network of advisers & its a legacy of 50 plus years. It has become customary to buy LIC, atleast your dad is bound to recommend you the same once you start your first job. However the fact is that the times when 4% returns from LIC were good(1950s to 1980s) are long gone. With inflation running 9% for a decade, LIC plans have been a big value destroyer for most. Unfortunately, it takes 2 decades for you to realize that you have lost money on LIC investment. So most people don’t even understand the 4% returns I am talking about from LIC.(& reading this, some are still thinking that their policy is something unique & will be much profitable than usual 4% that “others” may get)
3. The great Indian social obligation: The LIC agent is mostly a known social person from the same locality. It becomes almost obligatory to buy policy from agents, even if you know that you don’t understand the investment. Also what is the adviser’s interest in pushing the plans ? Of course, LIC is one of the best in commission payouts largely because of the nature of the policies sold(endowment plans). Whats worse, there is no accountability on returns since most plans work on 20 plus years tenure. So you can’t even confront agent like you can in case of ULIP/market linked plans. You tend to feel that your investment are good & guaranteed !!
4. The same old (mis) selling pitch: Most importantly, majority (tempted to say all) LIC agents almost have a similar pitch. They almost never talk to you about “annualized returns”. The pitch is “your money grows 4 times in 20 yrs…..6 times in 30 yrs, etc”. Most people can’t calculate what the annual % returns are. Fact is most returns are 3.5% to 5% max. But it is never stated clearly on paper & the agent gets away by quoting “additional bonus” & other stuff. No clear track record of past annual returns % ( considering all bonuses) is disclosed by LIC. This actually helps the agent & LIC supports this by not taking any efforts to curb this mis-selling. Who will buy any policy if it were known that returns will be 4% only ??
5. The smart financial buyer (at-least this is what he thinks): Finally, the Indian buyer thinks that he is being smart by taking a small percentage of the commission from the agent. What he certainly doesn’t realize is that the “cut” he takes in first year is just a small fraction of the money that the agent & LIC will make year on year. The Result: The customer buys some flimsy dreams from LIC, gets stuck with a poor product that can’t even beat inflation & can’t even get out of the policy going forward.

If LIC policy made serious money, entire India would have been a much richer nation.There is nothing “intelligent” about investing in LIC. Something that soo many Indians do without thought is never going to make you rich. Is that too difficult to understand ? You decide.

Hope the above points help you understand the key reasons why LIC & traditional endowment plans even by private insurers, still dominate the Indian market.