Insurance, the topic doesn’t need introduction, especially after the pandemic Covid-19. It has rooted deep into the country’s economy and people’s life. Of course there are people, who still believe insurance is waste of money and time, but let’s not get into that now.
This article is for those who want to identify the type of insurance that suit them. Of course by now you should be aware of different types of insurance available in the market (If not you wouldn’t be reading this I assume). It is always a hectic task to pick the one best insurance that suits us, since the market offer various type of insurance schemes.
Note: Before you buy any insurance do a research on various institutions that offer insurance and schemes that’s listed by them. Take advice from the insurance agent, but never relay only on his information.
Here we are going to compare the two prominent types of insurance, Life insurance and term insurance. First let us understand what life insurance is and what term insurance is.
What is Life insurance?
The name says it all, an insurance that covers your life. The sum assured will be payable either on the account of death of the insured or after a set of period (It’s called Maturity). In simple words, Life insurance is like a saving scheme where one deposits money on a regular basis to attain a financial goal, which materializes even on his/her death. The premium payable to a life insurance scheme is higher than term insurance.
What is premium?
The amount one pays for an insurance contract. This might vary based on the type on insurance one chooses. The premium can be paid monthly, half-yearly or yearly.
What is Term insurance?
Term insurance offers only insurance not maturity. The premium paid in term insurance will not be repaid, but the coverage amount will be payable if the insured dies (Unfortunately). It is to give financial security to the insured’s family on account of his/her death. The premium payable to term insurance schemes is less comparing life insurance. In other words one gets huge coverage for lesser premium.
Which is better for me, Life insurance or Term insurance?
Now comes the real doubt which is better for me life or term, well it’s up to your risk appetite. Hah! That’s the most awkward answer you would be expecting from this article.
My answer would be, if you are between 20 to 40 years of age, go for term insurance (But make sure to start a solid investment portfolio) , but if you are 40 and above, then Life insurance is your better choice.
Why is it so? Let’s break it down
To put it in simple terms, Life insurance offers definite but less maturity value, on the other hand term insurance offers large sum assured with minimum premium. The remaining amount can be invested in better investment options like mutual funds to get higher returns.
Let us understand this with an example
Let’s take New Jeevan Anand, one fine endowment plan with higher maturity value. Jeevan Anand is a life insurance plan with a maximum policy term of 35 years. It offers bonus every year. If the insured survives the policy term, he/she will be paid the maturity value along with the bonus earned. If the insured died during the policy term, the sum assured will be paid along with the bonus accrued until the date of death.
Here let’s take LIC’s Anmol Jeevan II, a term insurance plan which offers attractive sum assured for lesser premium. Along with Anmol Jeevan, let us add a mutual fund to this package. Now this two put together will yield better benefits.
Putting this packages into action
Let us consider Mr. Clever, who is 25 years of age is ready to invest Rs. 2000 every month in Insurance. In scenario one, he has to pay Rs. 1909 per month as premium for LIC’s New Jeevan Anand. With this premium he would get Rs. 5 Lakhs (5 hundred thousands) as sum assured. The policy term would be 25 years.
If Mr. Clever survives the policy term, he would get Rs. 1337500 (Approx, Might differ based on the bonus received). In case if he dies, his family would get a minimum of Rs. 5 Lakhs and the bonus accrued, but less than 13 Lakhs.
Now let’s put Mr. Clever in scenario 2, he has opted for LIC’s Anmol Jeevan II. Under this plan he would get Rs. 15 Lakhs as sum assured, with just Rs. 630 (Including taxes) per month. Now he has Rs. 1300 as excess, which he can invest in anything.
Here let us assume that he has invested in long term equity funds. Assuming that the equity fund has given 10% returns per year, Mr. Clever would get Rs. 17 Lakhs by the end of 25 years (Policy term). Even if he dies during the policy term his family would get Rs. 15 Lakhs from the insurance, as well as the amount he has invested in mutual fund with returns accrued so far.
Scenario two would give more returns than scenario one, i.e opting for term insurance with investment options would give better returns than life insurance. Here we have chosen average returns (10%) of equity mutual funds, there are funds that have yielded more than 15% per year. If the funds perform better, the returns would be much higher.
Direct equity is another best investment option, than mutual funds direct equity gives higher returns (Considering you have experience in share market). You can pick your comfortable investment option.
So it’s always better to go for better returns. Make sure that your money works for you and yields returns.
Well before we wind up the topic, our best wishes for you, by selecting to invest in insurance you have taken the right step towards financial security.
Note: Do consult with your financial advisor before taking any decision. Our advice on insurance is based on your risk appetite.
What is Risk Appetite?
Amount and type of risk that a person is prepared to take towards his financial goals