Here’s why you need term insurance
I grew up in a family where both my parents were in government service and we heard a lot about the importance of having a life insurance policy. It was a given – if you are a mature and responsible adult, you need to have an insurance policy to take care of your family in case something happens to you.
This homily, however, turned on its head when I started investing and all financial advisers tch-tched when I proudly showed them the LIC policies I held. Now I was totally confused. Is an insurance policy a good thing or a bad thing?
Here’s another statement that confused me further – insurance is good, but not life insurance!
When I finally decided to get to the bottom of this conundrum, I came across this new term – Term Insurance. So this is what I should be getting instead of life insurance. Well, here’s everything you need to know about Term Insurance.
What is Term Insurance
Term insurance is simply life insurance for a defined term – it could be a year, it could be 10 years, it could be 20 years. The premium is paid out annually. Term insurance is generally cheaper than life insurance. The aim of term life insurance is to simply ensure that your beneficiaries are taken care of in case of your demise.
There are no maturity benefits and no additional covers. This keeps the premiums low. In fact, the premium will remain fixed for the entire term. The thing to remember, however, is that the adherence to the renewal date is strict, failing which there might not be a payout.
How is it different from life insurance?
Before talking about the differences, let us understand the similarities. Both kinds of insurance policies guarantee the payout – for the term insured in one case and for the entire life-time in the other. The differences, however, are:
In term insurance, you decide the period of insurance cover. In traditional life insurance, it is to the end of life of the person insured.
In life insurance, the premium is high. With term insurance, the premium is lower and can ensure you purchase adequate coverage.
Term insurance is for the sole purpose of having a safety net corpus for your family/loved ones. Life insurance is often used as a wealth-accumulation tool and offers cash-backs.
This, however, is the red herring. You will be enticed by the offer of cash-backs and tax-free dividends and maturity benefits. But stay strong. Don’t give in. Do the maths. You will see that if you are looking at life insurance as a means of investment, you can get much better returns in mutual funds which you can channelise to pay your term insurance premiums. The ROI on a life insurance policy is generally not comparable.
When should I get a term insurance policy
The earlier you get it the better. The younger you are when you take a term insurance policy, the lower the premium. For instance, if you are in your 20s and you get a term insurance policy, you will probably pay a small premium while the sum assured for your beneficiaries in case of your demise will be quite substantial.
How long should the term be
The idea of the term policy is that in case something happens to you, your family is taken care of. So most people take a term policy for the duration that their family is dependent on them. Meaning, till such time that your kids are settled or you retire and your retirement savings start kicking in. Generally, the term policy is taken for 40 years.
Insurance is not an investment tool
Always remember, insurance is not the best option if you are looking at it as a means of investing your money. Term insurance is beneficial for the sole purpose of providing your family with a financial safety net in case something happens to you during the term of your insurance.
If you are looking at a life insurance policy as a means of increasing your wealth, that will not happen. The agents will show you maths that will make it seem as if the policy is paying for itself. But if you invest the premium amounts elsewhere, you will get much better returns.
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