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Advantage of term insurance over other types of life insurance

Term insurance plans are the simplest and most affordable form of life insurance.

ET CONTRIBUTORS|
Updated: Jul 01, 2019, 04.13 PM IST
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Term plans are, in effect, a sub-set of life insurance plans.
Mr. Verma, aged 30 years, was investment savvy. He had a diverse financial portfolio to take care of his financial needs. When it came to life insurance, Mr. Verma was assured that the plan he had invested in was sufficient for his needs. He was paying a premium of Rs 58,362 every year for an endowment policy having a sum assured of Rs 10 lakh. The policy term was 20 years and he was happy with the fact that the policy also gave him bonus additions besides the guaranteed corpus of Rs 10 lakh on death or maturity.

Mr. Verma had invested in an endowment plan which, he believed, was sufficient enough to provide a good insurance cover and also yield an investment return. Was he right in his beliefs?

Sadly, no. Do you know why?

Incomplete financial security for family
Though Mr. Verma had invested in life insurance, which is commendable, the plan does not provide him and his family the full financial security required in case of Mr. Verma's premature death.

  • If Mr. Verma were to die tomorrow, will his insurance policy prove sufficient in meeting his family's financial needs?
  • In today's economy, how long do you think Rs 10 lakh would suffice in meeting the Verma household's living expenses?
  • What about Mr. Verma's children's future education?
  • Would the death benefit of an endowment plan take care of possible future medical expenses?

Life insurance = financial security for nominees in case of death of policy holder
When it comes to life insurance, the primary motive of the policy is to provide financial security. Life insurance policies are unique with reference to the benefit they provide and the objective of financial security that they fulfil.

Financial security = fulfilment of the family's financial needs
Unlike regular investment avenues such as mutual funds or fixed deposits, only life insurance policies promise a benefit in case of premature death of the insured. This benefit helps take care of your family's living expenses as well as future financial goals in case you are not around to provide for them. Given this objective of the policy, having a sufficient sum assured becomes necessary. Only if the sum assured is optimal can the plan promise complete financial security. This is where a term insurance plan becomes indispensable. Let's understand how -

What are term insurance plans?
Term Insurance Plans are the simplest and most affordable form of Life Insurance.

Term insurance plans are life insurance plans which promise to pay a benefit only if the insured dies during the term of the policy. There is, usually, no maturity benefit payable under the plan. Term plans are, therefore, called pure protection plans.

Term plans versus other life insurance plans
Term plans are, in effect, a sub-set of life insurance plans.
Thus, they are a type of life insurance plan and have similarities with other plans. These similarities include the following -

Similarities between term plans and other life insurance plans
  • Like other life insurance plans, term plans give tax benefits under Section 80C of the Income Tax Act on the premiums paid
  • The death benefit received under the plan is also tax-free under Section 10 (10D), subject to certain conditions, like in case of other life insurance plans
  • There are return of premium term plans which promise a maturity benefit like other life insurance plans
  • You can buy term plans online just like other life insurance plans.

Major differences between term insurance and other life insurance plans

  • Term plans have more affordable premiums
Given the nature of term plans, their premiums are much lower than other traditional insurance plans. In fact, among all life insurance plans, term plans have the lowest premium. This low premium allows you to afford an optimal sum assured so that you can ensure sufficient financial security for your family in your absence. Other life insurance plans, i.e., traditional plans such as endowment policies, on the contrary, have higher premiums. If you choose a high sum assured in a traditional insurance policy, the premiums become unaffordable. Let's understand through an example -

If you are aged 30 years and need a cover of Rs 50 lakh for a policy term of 30 years, the premium for a term insurance plan and an endowment assurance plan of a leading insurance company would be as follows -

Premium for one of the company’s term plans (annually) Premium for one of the company’s endowment plan (annually)
Rs 13,747 Rs 179,672

Imagine the difference.

  • Term plans allow affordable coverage
Given the huge difference in the premium rates, affording a high coverage under any life insurance plan, except term insurance, is difficult. The thumb rule states that you should have a minimum life insurance cover of 10 times your annual income or sufficient to meet future living expenses and value of financial goals after accounting for inflation. Only term plans can give you the sufficient coverage without burning a hole in your pocket.

  • Term plans can be used to get complete future financial security
High coverage at affordable premiums is the only important factor which differentiates a term insurance plan from other plans of life insurance. While other plans might give you guaranteed returns, periodic money backs or lifelong annuities, term plans offer you the option of getting a sufficiently large sum assured at a low cost. This would allow you to give your family a complete sense of financial security at an affordable price.

  • Term plans have no saving component
Other life insurance plans, like endowment or money back plan, have a saving element in them. They promise to pay either a death benefit in case of death during the term or a maturity benefit if you survive the term of the policy. Term plans, on the other hand, have no saving element (except for return of premium term plans). They pay a benefit only in case of death and the maturity value is, usually, nil.

Most of us buy insurance plans offering guaranteed benefits and overlook term insurance plans. When buying life insurance, term plans should be given priority. If you need life insurance, you should look at buying other plans only after you have taken a term insurance plan with a sufficient sum assured.
The quotes are indicative and TIL bears no legal liability for the calculation.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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