By Saksham Arora Deciding how to secure your family’s finances in case of unforeseen circumstances is not an easy step. In India, it is a common thing to hear the elderly discuss “policies” or “investing for a rainy day.” However, after considering the various options, two names stand out most: Life Insurance (mainly traditional plans like Endowment or Money-back) and Term Insurance.
At first glance, they may seem to be the same product, though in reality, they differ a lot in their functioning. Let us cut through all the fancy talk and simply explain so you can choose what suits your family best.
What is Life Insurance? (The “Savings + Cover” Plan)
Traditionally in India, when the word “Life Insurance” comes up, people think of a plan with the two main features:
- Your life is covered by the plan in case of your demise.
- The plan also acts as an investment or savings instrument.
Simply put, picture a money box with a safety cover. You give a fixed sum (premium) every year. In case of your death, the insurer remits the amount to your family. If you remain alive and complete the duration of the plan (say, 20 years), the insurer returns your money along with a dividend called a “bonus.”
Life insurance is preferred because
- You receive the sum assured at the end.
- It is a good form of savings for major expenses such as a child’s wedding or building a new home.
- It is considered “safe” since the money paid as a premium is recoverable.
What is Term Insurance? (The “Pure Protection” Plan)
Term life insurance is quite straightforward. It essentially offers “pure” protection. A small amount of money paid by you can secure a large insurance cover. It is similar to car or health insurance. You pay for your car insurance annually. When a car accident occurs, the insurance company covers the repairs. If there is no accident, you do not get the money back. You just bought peace of mind that you will be covered in case of a mishap.
Term life insurance is quite similar to that. If the insured passes away during the “term” (the policy’s active period), the family is paid a large sum, usually 10 to 20 times their annual income. If the insured does survive the term, no payout is given by the company.
Reasons behind its popularity:
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It is very cost-effective. For the price of a few pizzas monthly, one can get a huge insurance cover.
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It can come to your family as a huge financial help for clearing loans or bills in your absence.
What do Financial Experts Recommend?
Majority of financial experts in India nowadays advise a very straightforward guideline: Always keep your insurance and your investments separate.
Now, let’s see why they mostly advocate term life insurance over traditional ones:
1. More “Peace of Mind” for Less Money
If a person earns ₹50,000 a month, their family might need ₹1 Crore to survive comfortably if that person is no longer there.
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Traditional life insurance plans could cost you ₹6 Lakhs or more per year for a ₹1 Crore cover. Majority of people can’t afford this!
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With a term life insurance plan, you can obtain the same ₹1 Crore cover by paying maybe ₹10,000 to ₹15,000 annually.
2. Flexibility to Invest Elsewhere
Specialists advise purchasing a minimum-cost Term Plan to protect one’s life. Next, take the additional cash you would’ve spent on a pricey traditional plan and invest it in items like the Public Provident Fund (PPF), Gold, or Mutual Funds, for example. Generally, these alternate savings methods increase your money at a much quicker rate than a life insurance policy.
3. High Cover for Debt
Loans for homes, cars, etc., might be a reality in many Indian families. So, in case the main earner dies, the bank will still demand the repayment of the loan. At present, only term life insurance can provide a sufficient amount of money at a very low cost to clear these large debts and, at the same time, leave enough money for the children’s education.
Which one should you choose?
Deciding between life insurance vs term insurance depends on your stage of life.
- If you are the breadwinner of the family, you have a family to support, or you have taken some loans; going for Term Insurance would be the best decision. It will ensure that your family will not have to worry about housing, and your children will be able to continue their studies in case of any eventuality.
- If you struggle saving money yourself and are looking for a safe, guaranteed way to get a lump sum amount after 20 years, without caring much about the lower returns, then Traditional Life Insurance is your choice.
Conclusion
If you are young or starting a family, the first thing you must do is buy a Term Insurance plan. Term Insurance is the most “human” act you can do for your family, ensuring they will never be financially hurting if something happens to you.
The bottom line is: You wish you never had to use it; however, you will be able to relax a lot more knowing it is available. After securing your Term Plan, you can then consider other Life Insurance plans or savings schemes to increase your wealth.
A plan with the most number of “bonuses” doesn’t mean it’s the best one. The best plan is the one that keeps your family’s hopes going even when the situation is difficult. Have a discussion with your family, take a look at your monthly budget, and choose the one that makes you feel comfortable.