You have life insurance, not term insurance. Here are few reasons why your life insurance cover is not enough.

by Vinaya HS on August 21, 2016

in Finance

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Most Indians have a life insurance policy today but why is it that very few have a term life insurance policy? While traditional/endowment life insurance policy provides returns on maturity, a term life insurance policy is different from a life insurance policy and getting a term cover may be important to have to get that ultimate protection.

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Here are few reasons why getting a term plan may be necessary to get sufficient life cover.

1. Flexibility helps fill in the life protection gaps as per your needs

Pure term plans while not an investment options help financially secure you’re loved ones in time of need. With every passing year due to changing needs and inflation rates the insurance cover needs to be revised from time to time. For instance, you may have taken a cover when you were 30 years of age but after that if you started a family this would mean that you would need to consider revising and increasing the insurance cover. While we don’t know at any given point exactly how much insurance is completely apt for us, however, it is essential not to have inadequate cover. Your current life insurance plan may provide returns when you are 60 years but considering the high rate of inflation and different needs at different stages of life the cover may not be adequate.

A term plan offers options where you can opt for a policy where payout increases every year. Also they offer great flexibility where you can also opt for online plans where companies usually do not insist on health check-ups if the cover is less than or equal to Rs 50 lakh. In such a case while you won’t be able to increase the sum assured during the renewal process, you can always opt for a new plan online as and when the need arises or even customize the plan with optional riders.

2. Lower premiums & higher cover

As there is no investment element included in the amount insured the best part about getting a term plan is that the premium amount is much lower than all the other insurance plans available out there. For instance: If you buy a term plan like the ICICI Pru iProtect Smart which offers a Rs 1 crore cover for 30 years then if you are currently 30 years of age the average premium will be only Rs 8000/- per year but a life insurance policy for a 30-year-old which provides returns on maturity can have a premium as high as Rs. 16,000/- per year or more with much lesser cover. In this case if your salary is 8 lakhs per year then Rs. 8000 is just 1% of your annual income for a cover as high as Rs. 1 crore. While you have the benefit of getting returns with a life insurance plan the whole objective of a life cover gets defeated.

3. Extra funds left over = added financial security from other investments

Due to the affordability of the term plans you can benefit by earning interest on investing the premium difference in other instruments with fairly good to high returns such as a PPF, FD’s, mutual fund or unit-linked plan which will give compounded returns. For example, if you had decided to put aside Rs. 36,000/- per year for the sake of insurance and the term plan costs only Rs.7940/- then you can invest the remaining Rs 28,060/- elsewhere. So if the difference Rs 28,060, is invested for only 15 years (half the time of the policy) at an interest rate of 10% a year, it will result in return of Rs 9,80,689/- and investing it for 30 years will mean higher returns. This way your family and you will have double benefits of returns which can be en-cashed earlier as well as an adequate life protection cover.

To illustrate this further in another example for a 30-year-old male, we take a life cover of Rs 10 lacs for a policy term of 15 years, the annual premium is Rs 67,070 (exclusive of service tax) and a term insurance of Rs 50 lacs with a term of 15 years, the annual premium is Rs 5,985 (inclusive of service tax). We invest the remaining amount in PPF (Rs 63,432) every year. Let’s compare the returns.

The PPF and term plan combination outperforms the endowment plan in terms of returns and most importantly in terms of providing adequate life cover.

4. Provides additional riders missing in traditional life insurance policies

Your life insurance policy which you have provides returns at the end of the policy. But what if there is a mishap like a critical illness, partial or permanent disability and so on before the term ends? In these cases it would become essential to a cover that caters to your financial needs at that time. Term plans come with a host of riders which provide extra benefits at a nominal cost; including critical illness cover, partial or permanent disability cover, waiver of premium and income benefits. The advantage of a term plan is that it is pure protection which is what insurance is supposed to be so like in the case a person who works in the heavy industries a waiver of premium or a permanent and partial disability cover can be explored. Since riders come with additional costs it is better to buy a rider only depending on your needs and not just for the sake of it.

Comparison of two financial portfolios:

Makes an investment in a FD, PPF & Traditional life insurance Makes an investment in a MF, FD, PPF & Term insurance
Portfolio Value – 10 lakhs Portfolio Value – 10 lakhs
In case of untimely death with traditional life insurance policy the family of X will get Rs.10 lakhs. In case of untimely death with term insurance policy the family of Y will get Rs. 1 Crore & 10 lakhs.

So while the portfolio values of X & Y are the same (Rs. 10 lakhs), Y’s family who has invested in the term plan has much greater protection and also has money invested in an additional mutual fund as not present in the case of X. Hence Y’s family can expect good return with the additional mutual fund.

The bottom-line is that while it is good to invest and expect returns but we should not lose sight of the fact that the main reason we take insurance is to protect our family in case of an unfortunate event. As seen above a term cover is a pure insurance product which can be bought online at a very low cost and can provide a cover of as high as Rs 1 Crore 10 lakhs.

Thanks for reading this article. I'd love to hear your opinion. Please use the comments section below to share your thoughts. I frequently write new articles that also cover several other aspects of personal finance including credit cards, financial goals, health insurance, income tax, life insurance, mutual funds, retirement planning, and much more. You can Subscribe through Email and receive new articles directly in your Inbox or you can Subscribe through the RSS Feed and receive new articles in your feed reader.

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