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“Term policy” (term insurance) is the best policy

 

This article compares endowment policies and ULIP with Term Insurance, and recommends the best option for life insurance.

 

Are ULIPs the best?

We know that a Unit Linked Insurance Plan (ULIP) proves to be better than an Endowment plan.

(Don’t know this yet? Read “ULIP v/s Endowment Plan for Life Insurance“)

But the real question is – Is a Unit Linked Insurance Plan the best way of buying insurance? Let me cut to the chase and give you a straight answer – No, it is not. And now, let’s see why!

 

Separating insurance and investment

Why does one buy life insurance? What is the need for life insurance?

The answer is simple – Life insurance is bought so that our dependents can continue to lead a normal life even when we are not around.

When you buy insurance for your car, or your home, do you expect any return on that “investment”? Do you expect that if the car doesn’t meet with any accident, you would get the money plus some interest on it back at the end of the year?

Of course not! Then, why should we expect our Life Insurance to pay us back, and in turn pay a lot more for insurance than it actually costs? Should we not buy “pure” insurance, like we do for our car or home?

Yes – that is exactly what we should do! We should understand that insurance and investments are different, and they need to be treated differently.

For investments, you need to identify goals and strategies, and make investments accordingly. (Please read “Goal Based Investing“).

For life insurance, you need to calculate an amount that your dependents would need, so that they can lead a normal life out of the returns generated from it. This amount should be the “Sum Insured” when you buy a life insurance policy, and it should be a risk-only policy.

 

Term Insurance or Term Policy

Term Insurance provides such a pure, risk-only cover for your life. It is a type of insurance where your premium amount is used only to buy insurance for you – just like car or home insurance.

Since the premium amount is used only for insurance, the biggest benefit of a term insurance policy is that it provides life insurance at the lowest possible price. This means that the money saved can be invested in other avenues to fulfill other goals, while still enjoying the benefit of adequate insurance!

One perceived drawback of Term insurance plans is that you don’t get back any money at the end of the term if you survive. As we discussed earlier, just like insurance for your car, you need not get anything back!

But if the fact that you don’t get back any money at the end of the term bothers you, there is a variant of term plans available – and it is called Term insurance plan with return of premiums (ROP). Here, if you survive the term of the policy, you get back all the premiums you have paid. And the added benefit is that this amount is tax free! But please note that the premium amounts are higher in term insurance with return of premiums as compared to regular term insurance plans.

 

Illustration

For a sum insured of Rs. 10 Lakhs for 25 years for a 30 year old male, following are the indicative market rates:

  1. Endowment plan: Rs. 38,109 per year
  2. Term plan with return of premium: Rs. 8,836 a year
  3. Term plan: Rs. 2,964 a year

As you can see, there is a huge difference in the premiums, and as we discussed earlier, this saved money may be invested better in other avenues.

Please read “Are ULIPs a costly form of term insurance plus MF investments?” to know how term insurance and the money saved can be utilized effectively.

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