When Buying Life Insurance, Always Get A Term Plan
Your insurance agent would mostly insist that you buy an endowment or a money back policy instead, but that will not serve the purpose it is meant to
Indians want value for their money. So, when we pay for anything, we want something in return, Fair enough, you would say.
If one buys life insurance, one would normally pay a premium every year for a certain term. In the unfortunate event of the person’s demise, the insurance company pays the sum assured. If one buys a term plan and survives the term, he or she does not receive a single penny from the insurance company.
In case you survive the term and do not receive any pay-out from the insurance company, you should not be sad. Someone should be happy if one is not dead, and not feel bad about the ‘loss’ of premiums!
But this is the psychology that those who sell money-back or endowment policies insurance prey on. Basically, such plans are built in such a way that they give you a pay-out even if you survive the term. And it makes you feel like a winner. But you are not.
Let us come to that later.
Benefits Of Term Plans
First let us look at the features of a term plan and the benefits it offers.
“Term plans are also called “pure life insurance” because, unlike other types of life insurance, term life insurance focuses solely on providing a pay-out for a set period, without any complex investment components,” says Madhupam Krishna, Securities And Exchange Board Of India Registered Investment Advisor (SEBI RIA) and chief planner, WealthWisher Financial Planner and Advisors.
One of the biggest advantages of term life insurance is its cost-effectiveness. Because it's designed to provide coverage for a specific period, typically ranging from 10 to 30 years, the premiums are lower compared to more money-back or endowment policies.
“Another benefit of term life insurance is its transparency. The policies are easy to understand, with clear terms and conditions, and fixed premiums that won't change over time. This gives you peace of mind,” says Krishna. As we have said before, personal finance is simple and you should keep it that way.
Term plans also offer flexibility on coverage as per the requirement. It can provide cover from a few lakhs to crores. It also offers flexible tenures.
“When buying a term insurance plan, you can also add riders with your term plan to enhance your overall protection. Insurers offer riders like critical illness, terminal illness, accidental death benefit, permanent or partial disability, among others and pay additional lump sum benefit,” says Sabyasachi Sarkar, Appointed Actuary, Go Digit Life Insurance.
Why Money Back Policies Are A No No
Since endowment plans make a guaranteed pay-out, they obviously provide a lower life cover for a given premium. Also, the actual rate of returns on such plans is only about 4-5 per cent per annum. Yes, you heard that right!
Let us assume that a 30-year-old software engineer earns Rs 2 lakh a month. “One should opt for a life insurance coverage that is at least 10-15 times your income in order to ensure all the family expenses are taken care of,” says Sarkar.
In case he goes for an endowment plan he has to pay a very high premium for a sum assured of Rs 2 crore, which will not be feasible. Of course, he will receive pay-outs as mentioned in the policy plus bonus but that will not be a substantial amount when you look at it 15 or 20 years down the line. And in the unfortunate event of his demise, which was why he bought a term plan to begin with, the money his family would receive would be peanuts.
In case he takes a term plan, his premiums would be much lower. With that he has a Rs 2 crore life cover, plus he can invest the rest of the money in equity mutual funds to get much higher returns over a period of 15-20-year period. A 30-year old man who is a non-smoker will be paying an annual premium of around Rs 30,000 for a Rs 2 crore term plan.
However, agents whether online or offline will not encourage you to buy a term plan because term plans do not provide high commissions. So, they have no incentive in selling you one. In fact, a leading online insurance broker we spoke to refused to comment for obvious reasons.
Most life insurance companies offer 25 to 35 per cent commissions for the first year of policy premiums for money back policies. So you end up buying a product which you think is providing your adequate life insurance and is also a good investment, while in reality it is failing on both counts.
As we have told you repeatedly, never mix insurance with investment. Term plans are the best option to consider when looking at ways to safely secure the future of your loved ones due to its cost effectiveness and because it serves the purpose it is meant to serve. Your neighbourhood insurance agent may request you to buy a money back policy so that he can achieve his target, but it is a very bad buy.
