Is Buying Term Insurance an Investment or Expense?

When we think about investing our hard-earned money, our minds automatically try to calculate the returns that we can earn through different investment avenues. So, where does insurance stand with investments like mutual funds, equities, etc. Well, placing insurance in the same category as other investment options would not be the wisest, considering that the primary purpose of insurance is protection. Some people are sceptical when it comes to term insurance - all that they see is they’re putting in the money, but aren’t reaping any monetary benefits. This kind of thought can actually do more harm than good to one’s portfolio, and in this article, we will tell you why.

What is Term Insurance?

Term insurance is a type of life insurance product that offers financial coverage for a specified period of time. This can be 5 years, 10 years, 20 years, 30 years and so on. In the event that the life assured (the individual on whose life the policy is taken) passes away during the policy period, the insurance company will pay out the sum assured (coverage amount) to the beneficiary listed in the policy.

Example of how term insurance works: 30-year old Mohit purchased a term insurance plan for 30 years, which essentially meant that he would be covered till the age of 60. The listed sum assured of the policy amounted to Rs. 50,00,000. Now, Mohit met with an accident and passed away at the age of 40 years. Since his demise took place while he was still insured, the insurance company will pay his beneficiary the promised amount of Rs. 50,00,000.

How is Term Insurance a Worthwhile Investment?

The intent behind getting a term insurance cover is that you’re financially securing your loved ones in the event you are no more. Life is unpredictable and there is no saying what can happen next. With a term insurance plan, you can make sure that your family does not face any kind of financial distress, since the payout from the policy should take care of everything. The insurance company does not have a say in how you decide to use the policy proceeds - it is completely up to your family. They can use it to cover burial expenses, living expense, school or college fees for children, home loan re-payment, etc.

Term insurance is the most-affordable form of life insurance products - for as little as Rs. 8,000 a year, you may be able to buy a cover of Rs. 1 crore. Considering that the plan is easy on the pocket, you can include this in your portfolio along with other investment options. In case the ‘returns’ component is still your concern, you can always go for term insurance with return of premium plans (TROP). This type of term plan functions quite similarly to a regular term plan i.e. it pays the death benefits in case of the life assured demise. However, the difference is that the premiums paid will be returned to the policyholder, if he or she outlives the policy term. Premiums for TROPs are higher compared with regular term plans.

Five Points to Consider Before Buying Term Insurance

Now, if you’re thinking about availing a term insurance cover, you should not simply opt for the first plan presented to you. Since it’s the financial future of your loved ones in question, you need to make an informed decision regarding the cover that you purchase. Below we have listed the five most important points you need to consider before buying a term plan:

• Coverage Amount : It is generally recommended by insurance experts that the insurance cover should be around 10 to 20 times one's annual salary. So, if you are earning Rs. 10 lakhs on an annual basis, your minimum coverage should be Rs. 1 crore to Rs 2 crores. If there are any outstanding debts, then that must also be included. The sum assured should be such that it will help repay any outstanding debts and maintain the lifestyle of the family members.

• Riders : Almost all insurance companies will offer additional optional riders along with term insurance. The purpose of insurance riders is that they provide extra protection beyond what is offered by the base plan. Few of the riders that a life assured can consider are accidental disability or death benefit, critical illness rider and waiver of premium benefit. It should be noted that while a rider does raise the premiums slightly, it is definitely worth having since it provides an extra layer of protection.

• Premium Payment : Term insurance policies generally come with different premium payment options - regular pay, limited pay and single pay. Regular premium payment involves paying of premium on a monthly, quarterly, half-yearly or yearly basis. Under limited pay, premiums are only payable for a limited period, while the insurance cover stays in force for the entire policy period. A single premium policy, as the name would suggest, is one where the policy can be availed for a lump sum payment. Regular premium is usually the most preferred choice among policyholders. One of the primary reasons behind its popularity is that the policyholders can claim tax deduction under Section 80C of the Income Tax Act, 1961, for all the years that the cover has been availed for. However, this is subject to whether or not premium payments have been maintained.

• Insurance Company : Considering that there are a number of life insurance companies in the market that offer term insurance products, it can get quite confusing to decide which company to buy the policy from. This is where claim settlement ratio can be of use to you.

  The claim settlement ratio is a numerical value that indicates the number of claims settled by an insurance company against those filed. It is advisable to consider those companies with a high settlement ratio. The IRDAI publishes the claim settlement ratio for all life insurance companies on an annual basis.

• Online or Offline : With the advancements in the field of technology, you can now undertake almost any transaction online, and this includes purchasing insurance. Nearly all insurance companies have an online presence. If you're tech savvy, you can consider this route. Many insurance companies even offer discounts to those availing plans online. Under the offline mode, you get the benefit of face-to-face interaction with the insurance agent. The choice between both the modes entirely comes down to your comfort level.

Conclusion

Term insurance is affordable, provides financial security and gives you peace of mind. Additionally, it also allows you to claim tax benefits under Section 80C, and the policy proceeds are completely tax free under Section 10(10D) in the hands of the receiver. When all of these points are considered, it can easily be concluded that term insurance is definitely a worthwhile investment. There is nothing you stand to lose in availing this plan - you only gain.