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.

Term insurance vs endowment plan

Mr Tendulkar wants to invest the remaining Rs 1.15 Lakh amount in Public Provident Fund. He wants to find out  the maturity values after 20 years with respect to Gavaskar’s case and also in his own case.

Term insurance ppf vs endowment plan

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 onComparison 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)

  • Himanshu Pandya says:

    Hello Sreekanth!

    I read your post regarding comparison between Term & Endowment plans and I really liked the post. Thanks for sharing valuable information.

    I have 2 queries:

    1 . I have one Jivan Saral LIC Police 20 yrs. ( june, 13)
    2. one money back policy having same 20 yrs ( started feb,14). When I will get started money back from this policy.

    I am investing around RS. 10,000 to 11 ooo in this policies . This policies correct decision?

    Waiting for your reply , it will help me lot..

    Thanks !!

  • GGP says:

    Pl avise. My son is 28 , which insurence is better for him.

  • Abhishek kharey says:

    Hi Srikanth,

    I have both term plan ( 1 cr ) & medical insurance ( 25 lakhs ). Please suggest me the best investment plan for my baby girl. She is 1 year old. I know about Sukanya but I am trying to check if there are any better options.

    Any help would be appreciated.

    Abhishek kharey

  • Pranav vashi says:

    Wont the premium for term insurance also increase with age?

  • BALAMURALI says:

    Hi Srikanth,

    First of all i would like to thank you for sharing useful information.
    I have PPF acount and paying since 2011 and investing around 1.5 lakh from last 3 years.
    Also i purchased LIC jeeval saral in feb 2012 and paying 49000 rs premium every year.
    I invested in ULIP b/w 2007 to 2010 and i lost my money.

    Can you suggest me whether to continue investing my money in jeevan saral or shall i go ahead with Mutual funds(SIP). I am planning for long term investment. Also please let me know the best short term investments(maybe 5 year term).


    • Sreekanth Reddy says:

      Dear BALAMURALI,
      PPF – Kindly continue your investments.
      Do you have Term insurance cover? ,besides jeevan saral??
      Do you have family members who are financially dependent on you?
      May I know your financial goals & investment horizon?
      Kindly read:
      List of articles on Personal Financial Planning!

      • Balamurali says:

        Thanks. I don’t have any term insurance apart from lic Jeevan saral. As of now I have ppf and lic and an FD of 5lak. I am planning to invest 10k per month for 3 to 5years in MF or equity funds. Please suggest me which can we good yields.

        • Sreekanth Reddy says:

          Dear Balamurali ,
          If you have dependents, buy a term insurance cover and you may discontinue this policy.
          For 5 year horizon, you may pick one Large cap fund & one balanced fund.
          Ex – Birla Frontline equity & HDFC Balanced fund.

  • Pratap Bhat says:

    Dear Sreekanth,

    Firstly many thanks for publishing this article. I’ve been searching for this comparison with an example for a long time. I had 4 LIC endowment policies, 2 of them made for me by my father. One of these 2 was a 30 year policy which was already 20 years old! I cancelled all of them in 2015 after I found out about term plans, even the 20-year old one simply because I didn’t want to carry on with them. I recently got a term plan. But it would be very helpful if you had some excel file where you did the math behind the returns of your comparison. Also, please see this link to know where the money received from LIC endowment plan holders is going – LIC is growing richer by investing it in the stock market!
    URL Link : https://goo.gl/BcR5x3

  • Aks says:

    Very nice and practical analysis Sreekanth!
    I’ve recently found your website and reading almost all articles as they are interesting and eye-openers.

    Query –
    I’ve been working in US for long term and since last 7 months staying in India due to personal reason. I’m currently not working anywhere and would resume work once I go back. I however want to buy a Term policy now, so that I can continue with it, even after acquiring US citizenship. Please provide your valuable insight and suggestions.

  • shailesh says:

    dear sir,

    I am 35 yrs old and having 12 lacks ctc and I want to do lic policy.
    which one is better ie jeevan anand or term plan.
    I have two kid at the age of 5yrs and 2.5 yrs.
    where I have to do saving of my money .
    I have currently housing loan which is remaiing of 9.5 lacks at 21152 EMI ,
    I have a company provide mediclam of 2.5 lacks per annum.
    kindly let me know best sip plan for future.

  • senthil says:

    dear mr.sreekanth,
    how are you? i am planning for a retirement scheme. i am ready to invest 2 lakhs per annum for the next 12 years. so from 13 th year onwards i should get atleast twice the amount that is 4 lakhs per annum as pension . which retirement plan will be good for me.

    thank you

  • Rajesh says:

    Thank you for sharing wonderful article, it was really an eye opener.
    I am 36 years old with 2 kids, my wife is not working. I am Working in IT industry.

    I was thinking of disposing LIC policies and take a Term insurance plan.

    Kindly check my current status and provide a better solution, your guidance is really helpful for me.

    1. My monthly CTC 12 Lakhs before tax. Current take home around 97,000.
    2. Following are my current LIC policy details, with Yearly premium of 46K.

    Since 2005:
    Jeevan Anand T149 – 2 Lakhs
    Money Back Policy T 75 – 2 Lakhs

    Since 2010:
    Jeevan Kishore T102 – 2 Lakhs
    Jeevan Anand T149 – 1 Lakhs
    Jeevan Anand T149 – 1 Lakhs

    3. Housing loan which just started few months back with EMI 18000 (25 years period with SBI, planning to do pre-closure).
    4. Having Mediclaim insurance of Sum Assured- 150,000 – Monthly Premium contribution -1,000
    5. Including EMI, house expense and all other stuff. I would spend close to 47K every month. Please note i excluded LIC premium amount here.
    6. I was planning to invest in Term Insurance, Mutual Fund and Medical Insurance. Kindly suggest your better options.
    7. I was thinking of (1 Cr + 50 Lakh accidental benefit) ICICI Prudential Term insurance.
    8. Is there any risk in purchasing the Term insurance online. As per your replies in this article there wont be any risk. But someone mentioned that they are not taking medical test if we buy term insurance online. Please suggest.
    9. Having few lakhs in FD, which my colleague suggests to use it for pre-closure of loan.
    10. Sukanya samrithi is there which i am planning to stop.

    Kindly suggest and provide your valuable suggestions.


    • Dear Rajesh,
      1 – Kindly let me know the tenure of your LIC policies.
      2 – If you not allocated sufficient savings or not yet planned for your other high priority goals like Retirement or Kid’s education goals, suggest you not to pre-close your home loan and instead invest for your goals.
      3 – You can buy a Term insurance plan online (no issues) and buy a plan where Medical tests are mandatory.
      4 – Sukanya scheme is one of the best long term savings option.
      5 – Is your current medical insurance the company provided one?
      6 – Buy a term plan with basic cover and then consider buying a stand-alone Personal accident insurance plan.
      Read : Best Personal Accident insurance plan.
      7 – Suggest you to go through this article – Important articles on the key aspects of Personal Financial Planning.

      • Rajesh says:

        Dear Sreekanth,

        Please find the details below.

        1 – Kindly let me know the tenure of your LIC policies.

        Since 2005:
        Jeevan Anand T149 – 2 Lakhs – 25 Years(Tenure)
        Money Back Policy T 75 – 2 Lakhs – 20 Years(Tenure)

        Since 2010:
        Jeevan Kishore T102 – 2 Lakhs – 20 Years(Tenure)
        Jeevan Anand T149 – 1 Lakhs – 16 Years(Tenure)
        Jeevan Anand T149 – 1 Lakhs – 16 Years(Tenure)

        Additionally there is a single premium endowment plan with profits, started in 2015 – paid 33 K (20 Years Tenure). Sum Assured : 60 K along with vested simple reversionary bonuses.

        2 – If you not allocated sufficient savings or not yet planned for your other high priority goals like Retirement or Kid’s education goals, suggest you not to pre-close your home loan and instead invest for your goals.
        —- Considering my current Salary and expenses, how much i can keep in FD and use some other stuff for pre-closure.?

        3 –You can buy a Term insurance plan online (no issues) and buy a plan where Medical tests are mandatory. –
        Please advise whether ICICI Pru is a better option ?

        4 – Sukanya scheme is one of the best long term savings option.
        — Is there any possiblity where goverment can reduce the interest rate to 1 %, since they are having the control 🙂

        5 – Is your current medical insurance the company provided one?
        —– Yes it was provided by company.

        6 – Buy a term plan with basic cover and then consider buying a stand-alone Personal accident insurance plan.
        —Please advise how much basic cover i can have, considering my salary ?
        — What is the drawbacks buying a Term insurance with Basic cover + Personal accident insurance plan.

  • Sandeep Gaddam says:

    Dear Mr. Reddy,

    I’m planning to buy a TERM plan, i have approached Max life for their term plus plan, If i purchase through an agent for the value of 50Lacks it costing me approximately 10000 where the same plan available at 6330 through their website,.

    My question to you is,
    if i purchase term plan through their website or through Polocybazaar.com will max life will good service for me. Please help me with these details. Please do the needful..

    • Dear Sandeep .. If you believe that your Agent is a trusted person and can help your nominee if there is any claim in future then you may go ahead through the intermediary.
      If you believe that your nominee can take care of Claim settlement process on his/her own, kindly consider buying the plan directly from the company through online mode.
      Disclose all the required info in the proposal form accurately and honestly.

  • Sandeep Gaddam says:

    Dear Mr. Reddy,

    Thank you very much for this wonderful info.

    I’m 28 years old, i don’t smoke or drink. I’m planning for 1 CR term insurance, could you please suggest me the best insurance company. Many Thanks..

  • hemant says:

    Hello sir.
    I have one term plan 70 lax with max life . And i want to start invest 2000 with elss franklin taxshield per month .and 2000 rs with equity .long term 15 to 20 years. This is good for me . If not suggest me where i invest this 4000 rs.
    I have a need for any insurance plan or not.

  • dr.murali says:

    Dear Mr. Srikanth, a wonderful read on term insurance plans.
    I would like to know how much of term insurance (limit) an individual can buy with his income. Is there a ceiling based on the income generated by the individual.

    • Dear murali..The maximum Sum assured offered can vary form one Life insurance company to another one, based on their Underwriting policies & guidelines. The minimum cover one should take is around 10 times of his/her gross annual salary.

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