Here’s A TIP (Term Insurance Plan) – Insurance Is Not An Investment
May 08, 2018 | 17:54 PM IST
May 08, 2018 | 17:54 PM IST
Why do we buy life insurance? There are no easy answers to this question. People buy insurance to counter the uncertainty of future. It's an instrument to safeguard the family's interest in the event of policy holder's demise. This is the fundamental objective of getting an insurance cover. Interestingly, people understand the importance of insurance but they horribly miscalculate the amount of life cover that their family would need if indeed the unfortunate event occurs. Generally, those who buy insurance policy go for a life cover of 8-10 lacs.
An amount as low as this will be inadequate to take care of a young family and all their needs. The growing inflation would rapidly devalue the corpus. This would defeat the purpose of buying an insurance cover, wouldn't it?
The reason people go for a such a low life cover is that they don't look at insurance as insurance but as an investment. Till some time ago, the money back policy was the most popular insurance scheme. It's simple, you pay a certain amount regularly and at the end of the term, you would get the assured amount back with interest and bonus, if applicable. Such money back plans wisely disguise themselves as an insurance cum investment scheme. However, in case the policyholder's demise, the family gets a terribly low amount as a death benefit. The family loses the regular income and also the maturity benefits of the policy.
Naturally, the glaring loopholes of the money back policy have made people look for a better insurance product.
Term Insurance Plan: Your Ultimate Insurance Solution
What is a term insurance plan, you may ask? Term insurance is an insurance in the true sense of the word. It gives you a big life cover, as big as Rs.1 crore, at the same time it is extremely cost-efficient. You may ask if the death benefit is so huge how come it is cost-efficient? This is the point where a term plan takes a diversion from the money back plan. A term insurance policy doesn't give any maturity benefits. This means if you survive the insurance period you don't get any money back.
Term Insurance Is Like A Car Insurance
To further simplify it let me give you an example. When you buy a car insurance, you pay a certain premium and at the end of the policy period, you renew your policy by paying the same premium. During the insurance period, if your car meets with an accident you are entitled to put in a claim for damages. However, if in the policy period your car is not damaged in an accident or in any other way that the policy covers, you CAN'T claim your premium back.
Similarly, in a term insurance, the insurance company is only liable to pay if the policyholder dies. If the policyholder survives the policy period, the insurance company is not liable to pay any maturity benefits or any money for that matter.
Mixing Insurance With Investment - A Recipe For Disaster
For years, people have confused investment with insurance. The biggest perpetrators in this grand scheme are the insurance companies. For a long time, they have promoted various insurance schemes as a form of investment. There is a generation of policyholders who bought insurance not to secure the future of their family but as an investment. The gullible investors bought policies expecting a big payout at the end of the term. They got the assured sum but the biggest mistake they did was not to factor in inflation while signing up for a life insurance. Needless to say, when you get your assured sum at the time your policy matures, the humble payout dissolves like camphor in the fire.
Big Death Benefits At A Low Premium! How Do Insurances Companies Afford That?
When you buy a regular money back life insurance policy you are made to pay five times more premium than a term plan. The reason is simple in a regular plan, the insurance company has a dual obligation they have to give a life cover and also maturity benefits at the end of the term. As they have to pay the money back with interest, they have to invest the amount in financial instruments like equity and debt and also have to keep the provisions ready for shelling out death benefits. On top of that, there are operational expenses and taxes which further spikes the premium of the regular policy. You can look at it this way, insurance companies take your money and invest it for you as to give you returns when the policy matures.
A ProTip: The same money, if you invest in an equity mutual fund would give far better returns.
In case of Term Plans, the insurance company is only betting against the risk of the future. As they are free from the obligation of giving maturity benefits, they offer a considerably big life cover at a reasonable price.
Buying A Term Plan Simply Means More Money For Investment
As we discussed above, term insurance is the purest form of investment, it only covers the risk and doesn't get into the domain of investment by promising returns. As a result, your annual premium cost comes down significantly. Let's understand how much money you would save if you go for a term plan.
If a 30 years old person opts for a term plan for an assured sum of Rs.25,00,000 with the period of 25 years, the premium would be approximately Rs.5,000 p.a. If the same person goes to buy an endowment plan or a money back plan for the same period the approximate premium would be Rs.22,000 p.a. The worst part is in the endowment and money back plans, the sum assured would be far lower than Rs.25,00,000.
The above example illustrates that by buying a term plan an individual can save approximately Rs.19,000. Saving such sum annually can give a big boost to your investment planning. The amount you save in premium can be invested in equity mutual funds which have the potential to bring higher returns in the long-term.
Use A Term Insurance Plan To Enhance Your Personal Finance
We have learnt that with a term plan you can save a lot on your insurance premium. Now let's see how you can utilise those savings. Personal Finance is a universe which consists of all the elements that deal with your money i.e. investment, loans, credit cards, savings (FD, saving certificates), insurance, etc. The key to succeeding in your personal finance is to instil financial discipline so you can deploy maximum money to growth options like equity funds or equity-linked investment. This means you have to monitor spendings, repay debts on regular basis (to avoid late charges) and choose right investment mediums for all your financial goals.
Taking a cue from the above example we can say that the Rs.19,000 that were saved can be either used to increase the annual investments or if you have any debt, you can manage to pay it quicker (By increased EMIs). Either way, it will help you to save money, by paying the debt early you save interest and by investing, you make provisions for future returns.
Apart from saving you money, a term plan has a broader relevance in your personal finance. If you buy just one term plan for an adequate life cover amount, you can rest assured about the financial security of your loved ones. As a result, you don't have to spend a penny more on insurance which helps you stay focused your investments.
For example, if Ravi buys a term plan and pays premium annually. Having secured his family's financial independence, Ravi doesn't have to spend any more money on insurance products. Now he invests regularly in equity funds to build his retirement corpus.
This is the biggest quality of a term insurance plan - it is your one-time insurance spending.
How To Buy Online Term Insurance Plan?
All the insurance companies like LIC, ICICI Prudential, Max Life, etc. offer term plans. LIC & HDFC term insurance plans are the most popular plans and are amongst the best term insurance plans available. If you are KYC compliant, buying a term plan online is extremely simple.
Once you land on the company's website you have to specify your personal details, your smoking habits, life cover amount, the frequency of premiums, etc.
Some insurance companies have a condition of medical check-ups, too. Upon completion of all the formalities, your term plan comes into effect and all you need to do is pay regular premiums.
The Lesson For A Smart Investor
The biggest takeaway for new investors is to not repeat the mistakes of old investors. Insurance companies lack the bandwidth to give high returns and maturity benefits. The payout they give at the end of long-term is not enough to fend even a single person in the fury of inflation.
Therefore, it pays rich dividends to separate insurance from the investment.
Your investment strategy has to consider the time frame, risk profile and expected global inflation as to build a corpus which will provide for all your needs post-retirement. Equity investment, whether in the form of stocks or mutual funds, has the power to give returns which will grow your money manifolds over a long period of time.