Term Insurance : Is it just a waste of your money?

In most of my financial counseling sessions the hot topic has always been, “Is term insurance the best form of insurance?” Or is it a waste of money?

Many investors have a perception that buying a Term insurance plan is a waste of money. They argue that the investor (insured person) will not receive any monies on maturity of the insurance plan. They say that they do not get any investment returns on purchasing a Term insurance plan.

So, what type of insurance plans do these investors generally end up buying? Answer is.. they may end up buying Endowment or Money-back policies. Their point is that these types of plans provide ‘something in return’ on their investment.

Is there any way to prove that Term insurance is more cost effective than traditional policies (like endowment or money-back)? Can we prove this by considering an example?

The combination of Term insurance and other investment options can generate better investment returns. Let us understand this with an example and prove that Term insurance plan is indeed the best form of insurance to buy.

Term Insurance plan Vs Endowment Policy – Example

Is Term insurance really cost effective? Let us analyze this with an example.

Mr Tendulkar and Mr Gavaskar are good friends. Both of them work in the same company, have similar lifestyle and expect to maintain the same standard of living in future too. They want to invest around Rs 1.20 Lakh per annum.

Mr Tendulkar decided to buy an Online Term Insurance plan. He opted for Rs 25 Lakh as Sum Assured. The annual premium payment on this term plan is Rs 5,000. He has left with Rs 1,15,000.

His friend, Mr Gavaskar believes that buying a Term insurance plan is a waste of money. He bought an Endowment Insurance Plan from a leading Life Insurance company. He too opted for Rs 25 Lakh as Life coverage. He has to pay Rs 1,20,635 p.a. as premium amount.

Mr Gavaskar’s endowment policy may give him a maturity amount of Rs 44.37 Lakh after 20 years.

Mr Tendulkar with his investment plan of Rs 1,15,635 p.a. in PPF, gives him a maturity amount of Rs 55.94 Lakh after 20 years.  That’s a difference of Rs 11.56 Lakh. He also has Rs 25 Lakh life coverage through his Term insurance plan.

Kindly note the following important points :

• In the above scenarios, Mr Tendulkar’s and Gavaskar’s investments are all eligible for Tax benefits. Some of the investors/advisers may argue in favor of endowment or money-back policies citing Tax benefit as the selling point.
• Some Adviors/agents may say that you get bonus on endowment/money-back policies. Kindly remember that the bonuses paid by Life insurance companies are accrued but not compounded. The bonus payments are paid on maturity without being re-invested. You loose the benefit of COMPOUNDING.
• You can invest the balance amount ( in the Tendulkar’s case the balance amount is Rs 1.15 Lakh) in any other investment avenues (like equity mutual funds) based on your financial goals and applicable risk profile. In such cases, the maturity value can be a higher amount.
• Kindly know the importance of TIME VALUE OF MONEY. Time value of money is about the value or ‘purchasing power’ of money over time. Don’t get carried away if some advisor says that X policy gives you Rs 25 Lakhs as coverage. For many of us, 25 lakh is a huge amount today. But, do you think Rs 25 Lakh is a huge amount say after  20 years from now. Is your current insurance coverage sufficient for your family to continue the same standard of living in your absence?

Already bought a Term plan? You have taken a wise decision. Share the above examples with your friends who believe that “buying a term insurance is a waste of money.’

Remember this simple point : “Any life insurance plan which pays money before you die can be avoided.” Else you may end up buying costly and unwanted life insurance plans.

Do you agree with my views? What type of life insurance do you have? Do you have sufficient Term insurance coverage? Kindly share your comments. (You may visit my post on “Comparison of Best online Term Insurance plans.“)

(Image courtesy of Ambro at FreeDigitalPhotos.net) (Above premium amounts are of LIC e-term plan and LIC New Endowment Plan)