Term Insurance – Waste of Money or an Ideal Insurance Solution?

Term Insurance is one of the types of life insurance plans meant to provide protection against the risk of life. It definitely provides a peace of mind and a sense of fulfilling responsibility towards family. If you compare it with other life insurance plans, in terms of the amount of premium, it is much more cost effective and suits the financial budget as far as paying premiums are concerned. Such plans provide coverage for a certain period of time and expire after that period.

If we delve deep into the benefits of a term insurance plans, we would be able to understand why term insurance is the best insurance solution. However, before that, we must also ponder over some substantial facts associated with term insurance plans.

Term Insurance Considered as a Waste of Money is a Myth

The major objective of the term plan is to provide financial protection for the family in case the bread winner/insured is not around.

Usually the basic human idea is to have some return on the money, which is invested over a long term as in the case of a Term Insurance Plan too. People expect something in return on their investments, which they do not get it from the term plan, they consider it as a pure waste of money.

However, it is a myth which refrains many of us to opt for a Term Insurance Plan. Insurance ideally means providing protection to your loved ones, when you are not around. Term Plan is the ideal form of a Life Insurance which completes your financial planning goal. A term plan forms an important part of any financial portfolio because it safeguards your family against the immediate financial crisis in case of any unfortunate event. When you have a term plan as a part of your portfolio, you know that it will be the first option available to your family in case something unfortunate happens. It simply states that having a term plan will ensure that your family does not have to face financial crisis in your absence.

Let us now understand why term insurance is an Ideal insurance solution and why it stands at par with other life insurance products.

Term Plans are Cost Effective Life Insurance Plans

If you compare term insurance premium with that of any regular life insurance plans, the premium for the term plan is always the lowest one. The reason being that the amount of premium paid towards a term plan does not bring you any returns or payback on maturity. The premium component of a Term Plan comprises of the mortality charges as per the age plus very minimal policy issuance charges (which is a one time charge) to provide the death benefit to the nominees in case of the demise of the life insured during the policy term.

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Other life insurance products have an investment benefit attached to them. Due to this, their premiums are also on the higher side.

Not just the premium is lower, but the coverage level or Sum Assured  provided in the Term Insurance Plan is higher too as compared to other life insurance products. Term plan works best for those who have limited financial flexibility or do not wish to invest much in life insurance policy.

Term Plans Help in Better Financial Planning

Simplicity is one of the major advantages of the term plans, which should be considered just after the lowest-premium factor. It does not mix investment with insurance. When an investment feature is combined with insurance, other operational costs are added to the base premium amount. At the other end, the complication arises for the policyholder to differentiate between his investment/savings and amount employed to avail insurance.

Term plans help in better financial planning as it also helps the insured to save a significant amount of funds, which he, otherwise would have spent as premium in other life insurance plan. Term plan holder saves the remaining amount and can invest in the other financial investment tools to maximize returns.

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There are many other investment products in the market apart from life insurance plans, which provide a comparatively higher return. Anybody on any day would like to prefer instruments with a higher rate of return. Since the importance of life insurance cannot be underestimated and term insurance, being the cheapest option, it is the first choice of many.

Protection Against Liabilities

In today’s scenario, getting a loan to acquire assets like a car or a house is a general trend. However, acquiring property through a loan comes with a responsibility to pay back the liability. When you avail term insurance plan, you assure that you will pay back the amount whether you are alive or not. Term insurance is, in fact, one of the conditional requirements when you want to apply for the loan. It not just assures that you will pay the loan amount, but it also guarantees that your loved ones would not have to bear the brunt of the liability pending.

Flexibility to Opt-Out or Convert

It is much easier to opt out from a term insurance plan than from a whole-life endowment plan or investment insurance plan. Term insurance can be bought for the duration of minimum 5 years and maximum 35 years. If one does not want to continue with his term plan, he can choose to opt-out as per the terms and conditions mentioned in the policy. Since there is no investment component and maturity benefit linked to it, the insured has nothing to lose in it even if he stops paying the premium.

However, in the case of regular life insurance policy, opting out means losing on a considerable amount of savings. Also, there is a lock-in period of 3 to 5 years applicable in some of the plans, during which an insured cannot opt-out from the policy. Investing in a whole life insurance policy is a better option but leaving it in mid-term can lead you to pay the losses out of your savings that you had put in your investment insurance plan.

Another flexibility you get with a term plan is convertibility. If ever you wish to switch to a regular life policy, it is easier to do it if you have term plan. In case you want to switch from a regular life policy to another kind, convertibility subjects to your actual health status, which insurers observe through a medical check-up.

Tax Benefit

Life insurance plans come with an inherent Tax benefit. Term plans are no different. Under section 80C of the Income Tax Act, the premium amount of up to Rs 1.5 lakh, paid towards life insurance plan can be deducted from your taxable income.

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It does not matter whether it is a term plan or a regular life insurance plan. With other considerable features like lowest premium and flexibility to convert, tax benefit comes as an additional advantage to the term insurance plan holder. In short, why would a person like to go for an expensive insurance plan when he can get similar advantages and more under a cheap insurance plan?

With such a host of benefits available at your disposal, buying a term plan makes for a sensible decision which goes a long way in ensuring financial security and independence for yourself and your family.

Harjot Singh Narula

Harjot Narula is founder and CEO of ComparePolicy.com, an IRDAI approved insurance web aggregator focussed on selling online insurance for companies. Harjot has more than a decade of experience in software development and has also spent 5 years in US working for the mortgage and risk management industry.

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