Term life insurance, as the name implies, covers you for a specific term. It could be 10 years, or 15 or 20 or even 30. During that time, you pay your premiums periodically, most cases it is annually. In exchange, the people named in your policy are guaranteed a predetermined monetary benefit should you pass away.
That is what it is all about. Term insurance is intended to replace the financial support you provide to your loved ones in the event that you aren't there anymore.
Now on the flip side, you may live through the entire term of the policy. Let’s say you took a 30-year insurance policy at the age of 30. You live way past the age of 60. That is good news, but it gives the impression that the money paid by way of premiums has gone down the drain.
Why you should stick to a term plan
Dev Ashish is a fee-only financial adviser. He explains why this thought process is detrimental to your overall financial mindset.
Term plans are incredibly cheap. You can get a term plan of Rs 1 crore for just Rs 10,000 or even lower. On the other hand, a traditional insurance plan (like moneyback and endowment plans) can cost about Rs 25,000 for a measly Rs 5 lakh cover. Should you pass away, a payout of Rs 1 crore is more useful for your family than a payout of Rs 5 lakhs.
Imagine trying to purchase a non-term insurance policy that is worth Rs 1 crore. The premium will be humungous and there is a great possibility that you may not be able to afford it.
So it is pointless to focus on the fact that you may live through the policy term and “lose” all the money. When in reality it allows you to provide bigger protection to your family at a much lower cost.
Remember, insurance is bought to protect the financial wellbeing of your family should you die. It is not for your wellbeing.
But, if you are averse to a term plan, you can be a bit flexible. Instead of buying a Rs 5 lakh endowment plan for Rs 25,000, go ahead and buy the Rs 1 crore term plan for Rs 10,000. Invest the balance Rs 15,000 every single year in equity funds.
Chances are high that the total value of your investment after 20 to 30 years (assuming that is your insurance policy tenure) will be much higher than what the original Rs 5 lakh endowment plan would give on maturity. And what’s more, you simultaneously have a big cover of Rs 1 crore.
You get the best of both the worlds.
Is a lengthy term-life insurance policy worth it?
While Dev explains it extremely well, the counter argument is that maybe you really don’t need such a huge term insurance policy.
While that must be dealt with in detail in another article, it suffices to say that you cannot underestimate the need for a huge death benefit for your family.
Of course, it all depends on two major factors: the number of dependents you have and whether or not your spouse is earning well. If you have children, their education needs to be taken care of. If you have a home loan, that needs to be serviced. If you have parents, then their medical expenses must be taken into account.
Please do not consider life insurance as a non-essential expense. The value of protection is in the peace of mind it provides and the assurance that your family will not suffer financially should tragedy strike. And tragedy does strike.
Just don’t be underinsured.
