Want to know the Best life Insurance plan to buy to protect your family and loved ones from the threat that uncertainties of life pose? My vote goes to Term Insurance which is the purest form of life insurance available out of all the types of plans that various insurance companies offer.
Read the story of Neera and Anuj illustrated below to understand the impact and significance of term insurance plans.
Yet, if you see the sales figures of most insurance companies, you would know that Term Insurance is not a plan many people like to buy.
What is Life Insurance?
Let us develop some clarity about life Insurance and its purpose to understand why Term Insurance is actually the best type of life insurance. Insurance is a way of protecting the future economic value of economic assets against risk.
Viewed in this light, a human being who earns money is an economic asset for a family. Upon the unfortunate and untimely demise of this economic asset, a family suffers economic loss and possible economic strife besides the emotional pain caused by such an incident.
Life insurance offers a way of avoiding such economic strife if a human being with earning capability passes away unexpectedly.
Living Benefits and Death Benefits
Life Insurance plans offer two types of benefits in their plans
- Living benefit
- Death Benefit
As the name suggests, Living benefit is the benefit that the policy holder gets if she/he continues to live during the tenure of the policy. This is also called the Maturity amount. There are certain plans like money-back plans that give living benefits in a staggered manner by paying a certain amount every five years after the completion of a pre-determined period.
Death Benefit is the amount that is paid to the nominee in case of untimely demise of the insured person. This is also called the Sum Assured.
There are several plans that offer a combination of both living benefits and death benefits and these seem to attract the maximum number of sales. There is a psychological reason at play here which defeats the very purpose of insurance.
A large majority of people feel like their death due to any unexpected reason is highly unlikely and this is why they feel it would be a waste to buy a plan that does not offer any return for the premium they would pay for the insurance policy. What happens in such plans is that the death benefit is kept on the lower side while the living benefits are enhanced.
Why Term Insurance is Best Life Insurance Plan?
Term Insurance is the purest form of insurance to purchase in order to meet your need for life insurance. Most people either ignore or severely underestimate their and their family’s requirement for insurance.
The death benefit that is offered by non-term insurance plans that combine (investment and insurance) or combine (living benefits and death benefit) is nominal compared to the amount a family will need to live a life of dignity in case something untoward were to happen to the earning member/s.
This is not the case with Term Insurance plans and this is why they are the best insurance plans to purchase. In term insurance plans, the amount of premium that a customer needs to pay is marginal compared to the sum assured that the insurer offers in case of the death of the insured person. Also read blog on term life insurance vs whole life insurance
Being Under-Insured is a great risk
Neera and Anuj were a happy couple with two wonderful children. Tragedy struck when Anuj, 32, a corporate executive passed away due to a heart attack. Anuj had never thought that anything like that could have happened to him and this is why he had taken an insurance plan that came with a death benefit of only Rs. 2.7 lakhs and a significant living benefit from one of the most trusted Insurance companies by paying an annual premium of Rs. 10,300.
Neera was a homemaker and a devoted mother to her children who were aged 3 and 5 at the time this unfortunate event happened in their lives. Given the cost of living in middle class India, Rs. 2,70,000 was a nominal amount that could only sustain the family for a maximum period of one year. The insurance plan and the death benefit it offered could not protect Neera and her children who had to make serious lifestyle changes in order to survive after the sole earning member, Anuj, passed away unexpectedly. The purpose of insurance was hardly met.
Let us see how things could have been very different had Anuj taken a term insurance plan instead. Had Anuj, 32, paid Rs. 10,500 as annual premium and gotten a term insurance plan, his death benefit would have been 24 lakhs. Such an amount would have given adequate economic comfort to Neera who could have then lived her life comfortably by investing this lump sum amount wisely.
As we have seen in the case above, Term Insurance helps in meeting the real purpose of insurance which is to protect dependents from economic discomfort in case of untimely death. Being over-confident and playing the possibility of risks down is only a sign of immaturity as no one is completely risk-free when it comes to accidents or diseases.
In order to meet insurance needs, term insurance is the best insurance plan to buy instead of coupling Insurance requirements with investment objectives.