Is Term Insurance an Investment or an Expense?
Clearing the common misconceptions about term insurance
Delhi-based Adi (33) and his wife Tara (31) are discussing their financial plans. Adi is convinced about buying a term plan while Tara is not sure as to why a term insurance is required. She sees it as an unnecessary expense, especially because there is no maturity benefit. Let us see how the discussion pans out.
Adi: Tara, I have learnt that a term plan is the most comprehensive form of financial protection. It offers a large life cover for a small premium. I think it makes a lot of sense for us to get term plan.
Tara: Really? Is term life insurance a good investment? Say you invest Rs. 10,000 a year, how much money will we get back? And in how many years?
Adi: Oh, no. Understand that a term insurance is a pure protection plan. This means that I pay a premium for a fixed number of years, say 30 years; and get a life cover for that tenure. If something happens to me during that period, you, my nominee, will get the cover amount as death benefit. Otherwise, once the term ends, we won’t get anything.
Tara: What? Do you mean we pay lakhs of rupees, and not get anything back? How does that make any sense? Why not put the money in a fixed deposit or a recurring deposit?
Adi: I understand how this seems. But you must think about financial risks. Term insurance is a safety net has value as an investment. Imagine that even if we got back all the premiums paid after 30 years, what good will it be? At that time, it won’t even last us 3 to 4 months!
On the other hand, a term plan will pay you the promised money in case of my demise, any time during the entire policy term. This means that even if I am gone after paying a single premium, the entire sum assured of Rs. 1 crore is paid to you. Now does that sound too bad?
Tara: Oh! Okay. But what are the chances of something like that happening? Are you not being too pessimistic?
Adi: Well, of course I am hale and hearty today. But life is uncertain and I don’t want to leave anything to chance. What if something happens to me? With term insurance, I will get peace of mind. I will be assured that even if I am not here, you will have enough money to take care of yourself. A term plan is not very expensive and once we avail the plan, the premium does not change for the entire term.
Besides, don’t consider it as an expense. The peace of mind, convenience, and financial security that it provides us, is worth much more than a few thousand rupees a year. A suitable cover will help you meet all types of outflows, from household expenses and rentals to EMIs and school fees for our kids.
Tara: Okay! I understand this now. I always knew you were smart. You have busted my myth that term insurance policies are an expense.
Adi is able to convince Tara about the importance of term policy. Some more common questions regarding term policy are covered here:
What are the types of death covered in term insurance?
Term insurance covers natural, accidental death, or death due to some illness. Moreover, best term insurance plans also offer riders. Adi will get payouts or waiver of premium, if he suffers dismemberment due to accident during the policy term. Some riders allow additional payouts to beneficiaries on account of accidental death of the insured.
Are long term insurance benefits taxable?
No. Life insurance products offers tax benefits as per prevailing tax laws.
Are term life insurance policies renewable?
Term life insurance policies are a contract between the life insurer and the policyholder. Once the policyholder stops paying the renewal premium, the contract ceases to exist.
From Adi and Tara’s conversation we can infer that the term insurance plans are not an expense but a safety net and a wise financial decision.
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DISCLAIMER: MAX LIFE ONLINE TERM PLAN PLUS (UIN - 104N092V03) is a Non-Participating, Non-Linked Term Insurance Plan. Life Insurance coverage is available in this product. This plan is a pure term insurance plan that provides only death benefit and no maturity or surrender benefit. Insurance is a subject matter of the solicitation.