Why do we buy insurance? The answers could vary as per different needs. Insurance could be for the sake of financial protection, it could be a tool used as pure investment and for some it is just another means for Tax savings. Insurance plans available in the market are designed to cater different needs, thus one should buy insurance not just because one needs too but there has to be a definite reason and purpose for the same. There is no doubt that in many cases the purpose is sole tax benefits offered by the insurance plans. The “insurance” element is largely undermined at times.
The main purpose of insurance is providing financial protection to the dependents in case of untimely death or disability of the breadwinner for the family. Thus insurance should be treated mainly as per individual needs and then for the tax benefit purpose.
Let’s understand the two traditional insurance plans and see which would be a better choice..
A Term Life insurance Policy is one of the most basic plan available in the market. Since it is the oldest type of policy available most new or young clients prefer beginning with it and then as years go by switch to other different policies as it is easily available with least premium amount thus making it the most preferred insurance cover for young first time clients.
Term insurance policy provides pure death risk cover with no further benefits attached unlike other insurance policies which provide for survival benefits as well. The term insurance policies are time defined with no claim paid once the policy duration expires i.e. These policies are limited time based which implies that the family gets the claim in case of untimely death which occurs during the policy period not beyond the term for which the policy is taken. No payment received if the policyholder outlives the term of the policy. Upon expiration, the policyholder may decide to either renew the policy or let it lapse. If the policy lapses, there is no reimbursement of the premium paid over the life of the policy.
In case of term insurance the premium component is least in the initial period or if the policy is taken at a young age but it rapidly increases with the age of the insured. This rapid increase is due to the mortality rate being higher as age increases.
The term insurance being a pure death cover is used to support the family in case of untimely death to repay any outstanding post-death liabilities.
The Endowment plan is a combination of both insurance and investment. This plan covers the risk for a specific period and in case the policyholder survives the period the sum assured decided at the inception of the policy is made to the policyholder in the form of survival benefit. The premiums in this case are much higher than premiums for the term plans.
In case the policyholder dies during the term of the policy, the nominee is paid the sum assured along with the accumulated bonuses also known as the death benefit. And in case the policyholder survives the term the sum assured and the accumulated bonuses are paid as the survival benefit to the policyholder.
Since this plan provides guaranteed returns there are certain terms and conditions attached.
1) If the policyholder surrenders the policy within the first 3 policy years, he is not entitled to any surrender value.
2) If policy is surrendered after 3 years the surrender value received is less than the total premium amount paid for the 3 years.
3) The Bonuses are not guaranteed and generally paid only in case the company registers profits.
Now, having seen both the plans let’s compare the two plans:
Insurance theory stands on the principle of keeping insurance and investment apart and never mix the two. Thus, keeping this theory in mind term insurance is a better option since there is no investment element involved and thus no returns on maturity. The premium amount in case of term plan is less since it charges premium only for the protection and not investment whereas in case of endowment the premiums are loaded since it involves both investment and protection. The premiums in case of endowment is more since the premiums are invested in over instruments after deducting the insurance, mortality and other charges and return some part on maturity. The returns in case of endowment are much less compared to the premium paying terms selected.
Thus, all the above factors indicate that the Term Plan has an edge over endowment plan!!!