You absolutely need Term Insurance

What is Term Insurance? It is the purest form of life insurance.

Why do I say that Term Insurance is the purest form of life insurance? Because Term Insurance does exactly what life insurance is supposed to do, and that is to provide “insurance” or “protection” only in case of eventuality, nothing else. Other life insurance products may have some kind of investment and maturity amounts. But Term Insurance has nothing of the sort. The benefit of Term Insurance is only for the family or loved ones in case of death of the insured person. This is like Health or General Insurance where you get money only if there is a health issue or some other such eventuality.

So, then, why should people take Term Insurance? Because the input-output ratio is far higher than other insurance products. For example, for a death benefit of Rs.1 crore, the premium for a 30-year old person may be only Rs.20,000 per year. Even if this 30-year old person lives up to age 80, that is another 50 years, the total amount the person will pay as premium will be Rs.20,000 x 50 years = Rs.10,00,000 (Rs.10 lakhs). If the person dies at any time during these 50 years, then his/her family will get Rs.1 crore. And this will be with tax benefits. Normally there is no maturity benefit in Term Insurance, but nowadays many insurance companies are offering Term Insurance with Return of Premium (TROP). What happens in TROP is that if the insured person outlives the policy term, he/she will get back the entire premium paid. Thus, for our example above, if the 30-year old person is still alive after age 80, then he/she will get back the entire Rs.10 lakhs that he/she has paid as premium. However, in this case the premium will be slightly higher.

Other insurance products which have a maturity value do not give such a high death benefit. For example, a 30-year old person can take a guaranteed plan by paying Rs.20,000 per year for 12 years premium paying term and 25 years policy term. In 12 years, the person will pay a total of Rs.2,40,000 as premium. The death benefit for such a plan may be approximately Rs.2 lakhs if the person dies within those 25 years. The maturity benefit of such a plan may be around Rs.5 lakhs.

Life Insurance that includes investment (maturity value), popularly known as endowment or savings plans, are good as forced savings, but Term Insurance is imperative for those who really care about insurance and their loved ones.

There is one catch though. Like all life insurance products, the premium and other terms & conditions for Term Insurance is dependent on your age and health. A younger person who purchases any life insurance policy will always pay less than an older person. So, if a Term Plan worth Rs.1 crore for a 30-year old has a premium of Rs.20,000 per year, the same plan for a 50-year old may be Rs.50,000 per year. Moreover, if you develop certain age related diseases, then no insurance company will give you a new life insurance policy, but if you purchase the policy before you develop any disease then you will get all the benefits of the policy. That is why you should never wait to purchase a life insurance policy.

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