What is term insurance? Why is term insurance better? Why is my insurance agent not recommending term plan? Why should I take term insurance? Should we take life insurance for tax saving purpose? You may have these questions.
Regular life insurance policies we take from LIC are called endowment plans. In these plans, such as Jeevan Anand, the person gets life insurance cover while the policy is in effect. For example, you pay Rs 35,000 each year as premium for a life cover of Rs 5 lakhs. The family will get Rs 5 lakhs when the policy holder passes away. On the other hand, when the policy holder remains healthy & alive throughout the policy term, he gets maturity benefit at the end, say (for example Rs 16 lakhs after 20 years).
These endowment plans are very popular in India because of various reasons. Insurance agent sells it to you for tax saving. You believe that you get life insurance cover while the policy is in effect and the premium money don’t go as waste as it comes back to you in the form of maturity benefit. But what we don’t understand is neither life insurance cover nor the return (maturity benefit) are very low.
For example, a person pays Rs 36,700 for 12 years and stop paying any further. At the end of 20 years he gets back Rs 16 lakhs. If he had invested this amount in mutual fund through Systematic Investment Plan (SIP) route during the same period he would have made more than Rs 30 lakhs.
For insurance purpose we can take a separate term insurance plan. Premium is very less in term plan as compared to normal endowment plans. The person may be able to get Rs 1 crore life cover with a premium of around Rs 10,000 per year. While the actual premium might vary based on your age, health condition etc you can be rest assured that the premium amount will be very less as compared to endowment plan.
Compare this Rs 10,000 premium for 1 crore life cover vs Rs 35,000 premium for just 5 lakhs. You don’t have to lock/commit huge money every year for life insurance policies. You are free to invest rest of the amount in other investment opportunities that grow faster.
Term insurance plans don’t give any maturity benefit. You get life cover as long as the policy is in effect. That’s all. So you may think, “It is good only if I die. I don’t get any maturity benefit if I remain alive”.
I would like to ask you back, “If you are ready to pay Rs 10,000 as insurance premium for your Rs 7 lakh car, why not the same Rs 10,000 for your life worth Rs 1 crore?”