Why Should I buy term insurance?

Background – Term Insurance :

If an Insurance agent approaches you and want to explain you about term insurance.  What will be the first question that comes to your mind when you think about any insurance product. What will be monthly premium & return on maturity?

Here we are talking about term insurance hence you will not get any fix return during insurance term or at maturity.

Understanding of Pure Risk Insurance :

First we should understand what is term insurance? Term insurance is pure risk cover for a life offered by insurance company to policy holder. It means that if you take Term insurance for Rs.25 Lacs for 30 years at Rs. 4000 yearly premium, you have to pay premium over insurance term to get life cover of Rs. 25 Lacs.

Here you can get death benefit and an accident rider by paying small additional amount.

Investment for Risk cover:

Now coming back to original question of return on maturity. It is important to know that term insurance is providing cover in case of death of policy holder to his/her nominee.  Hence policy holder will not get any fixed return from policy. Also premium amount will not be return on maturity in most of such insurance plan.  So one would ask question then why I should pay premium.  I will invest money where I can get maximum return. Here we need to be very clear to understand what our need is.  I have seen people who are spending Rs. 50,000 to Rs. 80,000 p.a. in endowment insurance policy but if you ask what is sum assurance . Surprisingly you will get to know that he is having insurance cover of Rs. 8 to 10 Lacs only. 

It happens because of various reasons; for salaried employee having deadline for investment from their employer. Someone having his or her close relative working as insurance agent so he has to buy at least one policy.  And so on..

It is very important to priorities  three things in our life. 1. Life Insurance 2. Tax Planning 3. Wealth Maximisation .Just because you get some tax benefit, you should not buy insurance policy.

What should be sum assured?

One need to have sufficient sum assured which can be invested by his nominee in his absence so that nominee can get same monthly cash inflow which they are getting during existence of policy holder.  Say one person is earning Rs. 25,000 per month and Interest rate on Fixed Deposit is 8% post income tax @ 10%, he need to buy minimum term insurance of Rs. 37.50 Lacs .

There are lots of online insurance policies available in market. If you are not comfortable in buying online, you can take traditional insurance too. But one should first take sufficient life cover by paying small premium.

Eligibility for Term Insurance:

There are various factors which decide the premium amount. Age, medical checkup, gender, tobacco addiction etc. One needs to do medical checkup for getting approval of insurance policy. Higher the age, higher would be insurance premium. Some insurance company is taking different rates of premium for male and female.

Endowment Policy Vs Pure Risk Policy :

Now if one think, if I can get both investment and risk cover in endowment policy, why should I invest in Pure risk insurance . Please don’t mix investment with insurance. Kindly first give priority to your precious life.  Say If you want to take only term insurance of Rs. 50 Lacs for 30 years term at 32 year age, yearly insurance premium would be maximum Rs. 19000 in offline market from well-known insurance company but if you want to take insurance for same sum assured amount in endowment policy, you have to pay approx. Premium of Rs. 1.60 Lacs p.a. and get return as per terms and condition of policy.

If you have Rs. 1.60 Lacs for investment, first take term insurance and put balance amount in secure FD of schedule bank or investment in any other product where you can get good return. You can get more return than what you are getting from endowment policy.

Here my objective is to provide clarity regarding term insurance however there are various online product available where you can compare insurance policy offered by most of insurance company. You can do cost-benefit analysis and take decision to buy policy. Do your finance planning today. Read our post What is Financial Planning ?