Life Insurance- Is it worth buying and how much Life Insurance should I buy? Should I go for term Insurance? What are term insurance benefits and disadvantages and how the policy works? Do I get maturity benefits in term insurance policy? What are the tax benefits in term insurance?
I was addressing a meeting on Financial Planning in Mumbai. There were around 30 participants. So I asked a question to the audience.
How many of you are insured? All of them raised their hands.
My next question was – How many of you are adequately insured? Nobody knew whether they were adequately insured or not. The only thing they knew was how much premium they were paying towards Life Insurance.
Then I asked them a third question – If you die today, how many of you are sure that your family can maintain the same standard of living in your absence? There was a perfect silence!
There lies the real benefit of term insurance.
Term Insurance Benefits
Before checking how the term insurance policy works, let us see the term insurance benefits in a nutshell-
- Low premium (As there are no Maturity or Survival benefits)
- High Sum Assured/Cover
- Tax Benefits
- Simplicity & Easy to Purchase
- Competitive Pricing
- Family Security
- Peace of Mind
Let us see it with an example-
What are the Benefits of a Term Life Insurance Policy?
So I explained the participants about the benefits of term life insurance policy taking Suresh their Senior Manager as an example.
Suresh is aged 45 and is having 2 daughters; aged 18 and 14. He is getting an annual salary of Rs. 15 Lakhs. His company is offering him a Group Insurance cover of Rs. 20 Lakhs. He is also having a Money Back Policy for Rs. 2 Lakhs from LIC.
In case of the unfortunate death of Suresh now, his wife will get Rs. 20 Lakhs from his employer’s Group Insurance Policy. She will get another Rs. 2 Lakhs from the LIC policy. He is having around Rs. 5 Lakhs in his PF account and another FD of Rs. 8 Lakhs. He is not eligible for a gratuity since he has joined this company 4 years ago. He is having an outstanding Home Loan of Rs. 8 Lakhs also for the house they are staying in now.
What will be the situation of the family after his death?
Let us see the total benefits payable on his death:
- Amount from the company’s Group Insurance – Rs. 20 Lakhs
- Amount from the LIC policy – Rs. 2 Lakhs
- Amount accumulated in his PF account – Rs. 5 Lakhs
- Fixed Deposit – Rs. 8 Lakhs
So Total Receipts – Rs. 35 Lakhs
Amount payable towards the Housing Loan – Rs. 8 Lakhs
Hence,Balance amount available – Rs. 27 Lakhs
His wife is not working, nor is she having any other income. Now, she is required to spend around Rs. 10,000 per month for her daughters’ education and the household expenses. She has also to manage her daughters’ marriage too.
But with an amount of Rs. 27 Lakhs in hand, she will get around Rs. 18,000 per month as interest, if she invests that money. That amount will not be sufficient for her to meet the household expenses, because Suresh is spending around Rs. 30,000 per month towards the household expenses.
What Suresh has to do now?
The amount required to ensure an inflation adjusted monthly payment of Rs. 30,000 till his wife is aged 75, is Rs. 90 Lakhs. In addition to this, there will be an expense of Rs. 10 Lakhs each for the children’s higher education and marriage. So, the amount required for 2 daughters will be Rs. 40 Lakhs. Hence, his family requires Rs. 1.30 Crore, if they have to maintain the same standard of living in the unfortunate death of Suresh.
Life Insurance Policy of Rs. 1.30 Crore- Can he afford?
Suresh is paying around Rs. 10,000 per year towards his Rs. 2 Lakhs Money Back Policy. How can he pay the premium for a Rs. 1.3 Crore Policy?
He can afford a Term Insurance Policy at a less premium amount.
Yes. He can opt for a term insurance policy for Rs. 1.3 Crore and the annual premium can be as low as Rs. 27,000 especially with term plans.
What is a Term Insurance Policy?
In a Term Insurance Policy, the benefit is payable only in case of death of the policy holder.
How does a Term Insurance Policy Work?
In our example, in case of death of Suresh before the age of 60, his nominee will get Rs. 1.3 Crore, if he pays an annual premium of Rs. 27,000. If he survives till the age of 60, there will not be any payment from this policy.
Is it worth going for a policy with Rs. 27,000 additional expenses every year?
Of course. It is recommended that one should go for such a high value Term Policies to ensure smooth living for its dependents, in case of unfortunate death. Therefore consider the premium of Rs. 27,000 as an additional expense, because you are paying for the peace of mind which you are getting by taking the insurance cover.
So this is how a term insurance policy work.
Term Insurance Benefits – Is it worth buying?
After this calculation for Suresh, I could see others in the meeting getting busy in calculating their Life Insurance needs. Yes, these are the benefits of term Insurance.Therefore it is worth paying a small price for it.
LIC Term Plan with Maturity Benefit
There is no LIC Term Plan with maturity benefit or survival benefit.
Term Insurance Benefits on Maturity
There are no benefits on maturity for a term insurance policy.
Best Term Plan with Return of Premium
There are various term plans with return of premium offered by the insurance companies in addition to the pure term plans. Though it seems a better options, the premium in these type of term plans are very high.
Some of the best term plans with return of premium are
- TATA AIA Life Sampoorna Raksha Plus
- HDFC Life 3D Plus Return of Premium
- Aviva Life iLife Total Protect Assure
- Aegon Life iReturn
- TATA AIA iRaksha TROP
In Normal scenario if you are paying a premium Rs. 10000 for a term insurance policy, the premium would be atleast 2-3 times in term plan with return of premium.
What happens to term life insurance at the end of the term?
Since there are no survival or maturity benefits at the end of term in term life insurance, you do not get anything.
But now a days there are many plans in the market which offer return of premium at the end of tem in term life plan.
Do you get your money back after a term life insurance?
No, you do not get your money back after the term of term life insurance ends.
Do term life insurance premiums increase each year?
No, Term life insurance premiums do not increase each year because the premiums are fixed throughout the term of the plan.
Term Insurance Disadvantages
The only disadvantage, which people see, is that there is no survival benefit in term insurance. But I see it as an advantage. As a result,The lack of survival benefits in term insurance helps the insurance companies to reduce the premium of the policy.
What are the tax benefits in term insurance?
You get tax benefits under Section 80C also, if you buy a term insurance plan. That is one of many term insurance benefits.
In Conclusion, term insurance plan has lot of benefits. Also I suggest to buy a pure term plan. Furthermore you should not buy a term plan with total return of premium(TROP) because TROP plans have high premium.
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