Life Insurance Plans - Term v/s The Rest

When a financial planner suggests you to buy life insurance, it usually means buying a term plan. Any other endowment plans or ULIP plans are to be stayed away from, no matter how much money they offer at the end of the term period. However, why do we consider a term plan to be the right choice for you as opposed to several other plans which offer maturity returns and other attractive features? Even With the recently announced Budget, the laws have been changed to promote term & high risk cover plans.  We at Fpguru.com will give you a clear understanding of the same by comparing the several kinds of plans with a term plan.

Efficient coverage at low premium - A term plan is the most simple and the most effective way to insure your family against any financial difficulties in the event of an early demise. It provides you a fixed cover for a fixed term for a minimal amount of premium. However in the event of outliving the term, you receive nothing. Since your main aim of purchasing an insurance policy is to provide a cover for your family to replace the lost income, a term plan provides you with adequate cover at a very nominal amount of premium.

There are several other complex plans which offer you a fixed cover upon death along with a certain sum of money paid to you at the end of term. This is possible because the premium paid by you is directed towards two ends. A small part goes for the insurance cover. The rest is invested. On the invested amount there are charges as well. That is why these plans like ULIP’s & Endowments charge a very high rate of premium and correspondingly provide inadequate coverage or returns.

Simplicity vs Complications – A term plan is simple and easy to understand. A fixed premium, a fixed duration and a fixed coverage! You cannot go wrong. The many other plans available in the market are a mixture of one or more plans put together making them very complex. Avoid complexities because, in finance, simplicity rules! What you can understand, is what you must go for!

Returns – A term plan provides nil returns in the event of an individual surviving the policy term, whereas an endowment plan provides you a maturity value & a ULIP gives you market linked returns.  However, you must not forget the amount of premium you pay each year in order to achieve these returns.

E.g. In order to buy an endowment plan of Rs 2,00,000/- the yearly premium can amount to nearly Rs 16,000/- whereas you can purchase a term plan of Rs 25,00,000/- for just around Rs 8,500/-appx.

We believe that insurance and investment must strictly be kept aside. Instead of paying a higher premium, for earning nominal returns, purchasing a term plan for your insurance needs and subsequently investing the remaining amount of money can earn you better returns. Hence, if you purchase a term plan with premium amount of just Rs 8000/- or so, you can avail a cover of Rs 25, 00,000/- and also invest the amount of funds that you have saved by not purchasing an endowment plan, i.e. nearly Rs 8000/- to earn a higher rate of return in the market.

Tax Benefit – According to the existing rules, you can avail a tax benefit on the sum assured received, provided the sum assured is 5 times the premium amount. However, with the new Budget the rule changed to ‘the sum assured being 10 times the annual premium paid’. This has made many investment cum insurance plans taxable. Money back policies especially have lost their tax-saving sheen.

Ease of purchase – A term plan is very easy to purchase as it is easy to understand. It can now be bought at the click of a button on the internet.

However, do make sure your family is aware of your online purchase of a plan as it can help save them trouble at an unexpected future date.

Ease of functioning – A term plan is easy to operate. You pay your premium amounts each year and you receive coverage for another year. Owing to the nominal amounts of premium payable, it makes it easy to maintain a term plan as opposed to other expensive plans. In the event of an individual losing his source of income, he may still be able to continue paying his premium and avoid losing his insurance coverage.

A term plan is also easy to discontinue. In an unexpected turn of event, wherein an individual feels, he does not need life insurance anymore; he can simply stop paying the premium amounts to discontinue his policy, thereby offering complete ease of functioning. A term plan is simple and sticks to the basic purpose of insurance that is providing adequate cover for a nominal amount. Hence we strongly suggest a term plan for all your insurance needs. It simply cannot be replaced!

Source: fpguru.com