Term v/s Other Life Insurance – Weighing your Options

Life Insurance is a very important component of every individual’s financial planning.

In India, life insurance has been predominantly sold as a savings cum tax savings tool. The most important reason why life insurance should be bought is to provide security to our family. Most of the people that we have interacted with are ignorant about life insurance and the type of insurance policies they have purchased. Many educated people either don’t feel the need to buy life insurance policy or buy during the months of Jan/Feb/Mar just to save on income tax.

Unfortunately, this results in lot of people treating insurance as an investment not realizing what they are getting into. With heavy dose of advertisements in various media, we are led to believe that insurance is an investment. Most of the agents who make a living selling insurance products sell insurance policies that fetch them attractive commissions.

Let us now understand what life insurance is all about. It is simply a contract (insurance policy) between the insurer (insurance company) and the insured. On payment of the insurance premium, the insurer promises to pay the nominee a sum of money (sum assured) upon the death of the insured person. Life insurance is meant to provide protection to the family and loved ones of an individual so that they don’t face financial hardships in case of death of the insured person.

Insurance only provides the risk cover. If treated as an investment, the returns are diluted due to high charges. Moreover, you will have to continue paying premium for a very long time. If you come across an agent who says “pay only for 3 or 5 years”, it is a signal to stay away from such types of agents. This is a gimmick used to sell the insurance policies. All the illustrations shown by the agent is only a projection. If you do the actual calculation, you will find that the returns over a very long period of time are anywhere between 6 to 8 percent. This is because of the high agency commissions and policy administration charges. There are better avenues available where your investments can generate good returns beating inflation. This way you can avoid high commissions applicable to various investment plans floated by insurance companies.

Life insurance has only one purpose and that is to replace the economic loss in the event of the death of the insured person. Life insurance should protect your family from financial disaster in the event of death. In order to arrive at the sum assured, one needs to consider the following:-

  1. Value of outstanding loans if any
  2. Future value of expenses such as education of children and their marriage
  3. Calculate amount of money required to be invested in a debt fund which will generate a passive income for the dependent in your absence. This income should be sufficient enough to maintain a decent standard of living.

Remember, the amount of insurance cover you need, may change over a period of time. For most, it declines as the obligations towards the family/dependents decline and the value of investments made in various asset classes grow. At some point, it may so happen that you may no longer need insurance cover because you have become financially secured.

If you buy other insurance plans and fail to pay the premium after few years, the policy will lapse. Also if the policy is surrendered, you will suffer huge loss as the surrender value will be lower than the total amount of premium that you have paid.

When a 30 year old person can buy pure life insurance cover of Rs. 1 crore for approx Rs. 15000 per annum, why go for any other insurance plan by paying much higher premium and settle for lower insurance cover?

Next time you buy life insurance, please research carefully and make sure you are buying pure term insurance for protection to your family and not for the benefit of the insurance company and its agents.