What is Term Insurance? Why Term Insurance Is Better Than Endowment Policies?
Many people lack knowledge about term insurance. There is no wonder if I say that many do not even know that there is one such insurance exists. In this article I also let you know how insurance companies cheat us with endowment policies.
What is Term Insurance?
Term Insurance is also called as pure insurance that covers the life risk for a definite period of time and if the policy holder or the insured expires then the death benefit is payable to the nominee. Ofcourse the nominee will certainly be the insured’s family member dependent on him.
No other insurance can cover the life risk like Term Insurance does. Because of lack of knowledge many people always think negative about term insurance. Let me clear why they think negative on this insurance.
In Term insurance we need to pay very less premium every year ( it can be every month/half-year/yearly) and the risk coverage is very high. In case the insured is not dead during the policy period then he/she will not get anything. In other words the premiums are never refunded in the form of maturity benefit and also there is no bonus paid.
What is Endowment policies?
Where as in other policies like Endowment policies, the premiums paid will be returned along with some bonus on the maturity date or if the insured is dead which ever comes first. But on the negative side the premiums in other policies will be very high as against Term insurance policies. The risk coverage is also based only the total premiums paid or the sum assured accordingly.
Let’s take this example for endowment policies and how Insurance companies cheat us.
Sharma takes an endowment policy for 50 lakhs for a period of 25 years at the age of 20. By the expiry of the policy he may get around 75 lakhs total including the bonus paid. Means policy expiry is when he gets 45 years. The premiums are divided for 25 years. So he has to pay a premium of 2 lakhs every year. His expenses when he is at the age 25 is Rs.10,000 per month. Assume Sharma is alive and he gets 75 lakhs (total premiums paid + bonus) by the age of 45.
But he never knows that 75 lakhs is of no use to him after 25 years or it will cover his or his family life only to a negligible extent. Why? Inflation in India runs at an average of 6.5% every year. The bonus paid by the insurance companies is always around 5%. Forget about the bonus or the interest earned. It can not even beat the inflation rate. Moreover 50 lakhs belongs to him only as he paid that premium every year. When Sharma reaches 45 years his expenses per month will be around one lakh or even more at this present inflation rate which always increases. 6.5% is just official inflation rate. But we know how many times our expenses raising every month and year.
Now let’s take Term Insurance example. Most of the companies charge Rs. 14000 to Rs.26000 to get a Term Insurance policy for Rs. 1 Crore. What if Sharma takes Term insurance at an age of 30 for 35 years. Generally I prefer taking this policy between 30-35 years of age. Because the policy period for Term Insurance is mostly 30-35 years only given by any insurance company in India. So when we are 65-70 years we will be able to cover the life risk and save our family dependents at that time. Now Sharma starts paying fixed premium of Rs.25000 ( approx) every year for 35 years. When he reaches 65 years he might have completed paying a total premium of 25000*35= Rs. 8.75 lakhs and if it is for 50 lakhs he would have paid only 4.5lakhs in those 35 years. Now if he is alive then he will not get anything but if he dies after taking insurance then his nominee will get the entire sum assured of 1 crore. And, the significant point to be noted here is, the premium paid is very less but the risk coverage is very high.
Most of the people think that they do not get premiums back if they are alive. Tell me, what is the value of total premiums paid by you after 35 years? Let’s assume you paid 4.5 lakhs in 35 years for a 50 lakh sum assurance policy. I would say that 4.5 lakhs after 35 years can cover you only for 2 months and not beyond that. Yes you get that 4.5lakhs back if it is endowment policy. But any use of that amount after 35 years? Moreover the premiums paid will always be proportional to the sum assured in the case of endowment policies. But in Term insurance the premiums paid are almost negligible and the risk coverage is beyond expectations.
Please be noted that Term Insurance for life is similar to taking Vehicle insurance. We are very much interested in protecting our vehicle. We pay Rs.1000-1500 premium every year to protect our scooter. We know the premiums won’t be paid back if there is no damage to the scooter and still we take vehicle insurance and renew every year. But we never protect our life in this manner. So always prefer term insurance to cover your family members who are dependent on you and protect them after your death.
To sum-up the benefits:
1. Premiums paid are very less in Term Insurance.
2. Pure Insurance and hence it covers very high amount.
3. Get Tax benefits under Sec 80C for the premiums paid.
Many insurance agents discourage us taking these policies because the premiums paid are less and hence less commissions to them.It is only since 1 or 2 years term insurance policies slowly started to pickup momentum. So never listen to what your insurance agent says. You always have to order him what you want to do but not follow what he says.