Did you know that in a world of financial uncertainties, the decision between term insurance being an investment or an expense can significantly impact your future? It’s not just a matter of budgeting; it’s a strategic move that can shape the stability of your financial journey.
In this article, we delve into the confusion of term insurance, unravelling whether it’s a wise investment or a vital expense. Get ready for a journey that will empower you to make informed decisions, securing not just your present, but the legacy you leave behind. Before diving into the topics let’s know what the definition of term insurance is.
What is Term Insurance?
Term insurance is a type of life insurance that provides coverage for a specified term or duration. It is one of the simplest and most affordable forms of life insurance. If the insured person dies during the term, the death benefit is paid out to the beneficiaries. This amount is predetermined when the policy is purchased. Policyholders pay regular premiums to maintain coverage. These premiums are typically lower compared to other types of life insurance because term insurance only provides coverage and does not accumulate cash value.
There are different types of term insurance policies:
- Level Term Insurance Plan: A level term insurance plan is a plan where the sum assured remains constant throughout the term of the policy period and the benefits are paid to the nominee on the death of the policyholder.
- Increasing Term Insurance Plan: In increasing term insurance, the sum assured of the policy increases with the completion of each year. The sum assured in the second year would be greater than that of the first year and so on up to a certain limit mentioned under the policy.
- Decreasing Term Insurance Plan: In decreasing term insurance plan, the sum assured under the policy would decrease with each passing year. The percentage to be decreased under the plan can be pre-defined and the sum assured decreases every year until either the policy pays out or the coverage period comes to an end.
- Convertible Term Insurance Plan: This policy allows the policyholder to convert their term insurance into a whole life insurance policy without the need for a medical examination. This provides flexibility if the policyholder’s financial situation or insurance needs change over time.
- Term Insurance with Riders: Insurance companies often offer additional benefits, known as riders, which can be added to the base term insurance policy for enhanced coverage.
Common Myths and Facts about Term Insurance
There are several myths and misconceptions surrounding term insurance. It’s important to debunk these myths to make informed decisions about term insurance. Here are some common myths and the corresponding facts:
Myth 1: Term Insurance is a Waste of Money if You Outlive the Policy Term.
Fact: Term insurance is designed to provide financial protection to your dependents in the event of your death during the policy term. If you outlive the term, there is no payout, but it means you are alive and well, which is a positive outcome. The purpose of term insurance is not to accumulate savings but to offer a cost-effective way to ensure financial security for your loved ones.
Myth 2: Term Insurance is only for the Breadwinner of the Family.
Fact: While the primary purpose of term insurance is to replace the income of the breadwinner, it can also be valuable for non-earning members, such as homemakers. In the event of the death of a non-earning spouse, the surviving spouse may need financial support to cover household expenses, childcare, or other responsibilities.
Myth 3: Term Insurance Has No Benefits if You Don't Die During the Policy Term.
Fact: While term insurance does not offer a survival benefit, some policies come with options like Return of Premium (ROP), where the premiums paid are returned if the policyholder survives the term. However, it’s crucial to note that term insurance is primarily intended to provide a death benefit, and the absence of a payout if you outlive the term is by design to keep premiums affordable.
Myth 4: Term Insurance is Too Expensive.
Fact: Term insurance is generally more affordable than other types of life insurance, such as whole life or endowment policies. The cost of term insurance is lower because it focuses solely on providing a death benefit without accumulating cash value. Premiums are determined based on factors like age, health, and coverage amount, making it a cost-effective option for many individuals.
Myth 5: Term Insurance is Only Necessary for the Elders.
Fact: The ideal time to purchase term insurance is when you are young and healthy. Premiums are lower for younger individuals, and securing coverage early ensures financial protection for your loved ones during critical life stages. Waiting until you’re older can lead to higher premiums or potential difficulty in obtaining coverage if health issues arise.
Myth 6: Term Insurance is Complicated and Full of Hidden Clauses.
Fact: Term insurance is relatively straightforward, and policies are transparent about terms and conditions. It’s essential to carefully read and understand the policy documents before purchasing to ensure you know what is covered and any exclusions that may apply.
Myth 7: Term Insurance Doesn't Cover Deaths due to Illness or Natural Causes
Fact: Term insurance provides coverage for deaths resulting from various causes, including illnesses and natural causes. Term insurance is designed to offer financial protection for a specified term against both natural and accidental deaths, as long as the policyholder pays the premiums.
Case Study: Is Term Insurance Investment or Expense
Rama and his friend Tarak are discussing their financial plans. Rama is convinced about buying a term plan while Tarak is not sure as to why term insurance is required. He sees it as an unnecessary expense, especially because there is no maturity benefit.
Let’s see what this conversation tells about Term Insurance Investment or Expense.
Rama: Hey Tarak, have you considered getting a term insurance plan for your financial security?
Tarak: I’m not entirely convinced about term insurance, Rama. I see it as an unnecessary expense, especially since there’s no maturity benefit. Why should I invest in something that doesn’t give returns?
Rama: Well, Tarak, term insurance may not offer a maturity benefit, but it serves as a crucial safety net. It’s not an investment in the traditional sense, but it provides valuable financial protection for your loved ones in case something unfortunate happens to you.
Tarak: I get that it provides a death benefit, but I don’t see how it’s an investment. It sounds more like an expense.
Rama: Think of it this way, Tarak. While it might not accumulate cash value like some other types of insurance, term insurance is a secure investment in your family's future. The peace of mind, convenience, and financial security it offers are its kind of returns.
Tarak: But wouldn’t that money be better spent on something that gives returns or benefits during my lifetime?
Rama: Indeed, term insurance doesn’t provide returns during your lifetime, but its real value lies in ensuring that your family is financially secure if something were to happen to you. It’s a responsible way of planning for the unexpected, and the peace of mind it brings is priceless.
Tarak: I see your point, Rama. I’ll have to think about it more and consider the long-term benefits.
Rama: Absolutely, Tarak. It’s all about securing your loved one's future. Sometimes the true value of an investment is in the peace of mind it brings, knowing that your family is protected, regardless of what life may throw at you.
Why is Term Life Insurance as an Investment Considered a Secure Financial Choice?
Term life insurance as an investment is considered a secure financial choice for several reasons:
How to Buy the Best Term Insurance Plan Online in India
Following are the steps to Buy Term Insurance Plan online:
Step 1: Visit the ‘PolicyBachat website and click the ‘Term’ tab.
Step 2: In the next step enter the below details clearly and correctly.
- Gender of the applicant
- Tobacco consumption; Yes or No
- Annual income from the options given in the calculator
- Occupation type; Salaried or Self Employed
- Age of the applicant to be entered as Date of Birth
- Name of the applicant and email ID of the applicant.
Step 3: In this step, you can edit your requirements such as:-
- Sum Assured Amount
- Tenure - maximum age at the coverage is required
- Premium Payment Type - Regular Pay, Single Pay, Limited pay
- Premium Payment Frequency – Monthly, Quarterly, Half-yearly or Yearly
- Payout Type – Return of Premium Option
- Add-ons - Critical Illness, Waiver of premium, Accidental disability, etc.
Step 4: In this step, compare different types of term insurance plans and their premiums and features displayed on the screen. Then select the plan which is appropriate to your needs and budget. Then make payment via online payment method.
The question of whether term insurance is an investment or an expense depends on the perspective from which it is viewed. While term insurance does not offer the investment benefits of wealth accumulation or maturity returns, it stands as a crucial expense with invaluable benefits. The financial security, peace of mind, and protection it provides to loved ones in the face of unforeseen events make it a prudent and secure financial choice. It serves as a strategic and responsible allocation of resources to ensure that, in times of need, your family is shielded from the financial implications of losing a provider. The absence of a maturity benefit is compensated by the assurance that, during the policy term, your dependents are safeguarded.