Life insurance: Why term plans are a must have

All life insurance companies in India have term plans in their bouquet of offerings. The rates are also quite competitive. So it really does not matter which company you take the cover from (IRDA has done a pretty good job at regulating the insurance companies - all of them are safe). Based on your comfort level with the sales person and the previous experience with the company, you may choose to take your term plan.

Here are reasons to prefer a term plan over other options:
What is a term plan?
Term plans are no frills products that give us very high life covers for very low premiums. But term plans do not give anything back at the end of the term (life cover period) if you outlive it.
Why the term plan is so important is because, it is the most basic of all plans.
Agents / sales persons de-sell these plans using this feature to tempt us to high premium plans that do give us something back. However, term plans are able to give us high covers exactly because of this feature.
Most of the other insurance plans are built around these plans or have the term plans as a part of them. As the features get added, the premium also increases. But many times, the premium increase is very steep as the commission (to the agent) and company charges increase as a percentage of the premium. This increases the premium rapidly in value terms.
Here is an example: 10 per cent on Rs 100 (Rs 10) is something most of us could afford. The same 10 per cent on Rs 20,000 is Rs 2,000, which is a big amount for most of us.
Insurance Buying Scenarios
Since most of the agents / sales persons are taught to sell the cream (not the bread), we end up:
  • Taking an insurance plan that we need but at premiums that we could not afford
  • Taking a plan that we do not really need
  • Not taking any plan; effectively postponing a need.
In such a case, it is better to ask the sales person for a term plan.
Premium Amount Comparison
Let us compare term plans with one other product, which also does not give anything back at the end of the term - Vehicle Insurance. Though the basic features and coverage are different, a comparison can provide more perspective.
The two-wheeler full cover (third party  owner accident cover for Rs 1,00,000) insurance premium for a vehicle with Rs 35,000 vehicle value will come to about Rs 900 per year.
A four-wheeler full cover insurance premium for a vehicle with over 1500 CC engine capacity and current value of Rs 10 lakh will cost about Rs 28,000 per year. (Insurance for a car with capacity less than 1500CC will set us back by about Rs 25,000 per year.)
Compare that with the premium for a life cover of Rs 10 lakh for a 35 year old male. The premium here will come to only about Rs 4,300 per year.
Perspective Compared to Vehicle Insurance
See the difference in rates? One takes up insurance for my vehicle because it is mandatory and the traffic police man at the next corner may charge for not having one. Also, one does not get the premium back unless there is an accident.
But while buying insurance for our lives, it makes sense to buy a term plan (which costs only 17 per cent of that of a vehicle) even though it does not give back anything.
There is no monetary value for peace of mind. For everything else, do take a term insurance cover.
Disclaimer: All information in this article has been provided by and NDTV Profit is not responsible for the accuracy and completeness of the same.



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