Why a term insurance policy is the best life cover option
Posted by: Arti Bhargava on Jan 30, 2017, 06.30 AM IST
Gautam, a 28-year-old IT professional, has got married recently. His parents are financially dependent on him. He saves Rs.15,000 each month. He thinks his insurance requirement would be Rs. 50 lakh. For the term insurance plan that his relationship manager is recommending, his annual premium will be Rs. 10,000, payable over 30 years.
He thinks a term insurance is a bad choice because he will not get any 'returns' on it. It seems unprofitable to him, as he is unlikely to get back the amount he pays as premium. Is term insurance really a waste of money? Should Gautam consider an insurance cover which provides a good 'return' at the end of the tenure instead?
First, Gautam needs to be educated about the concept of insurance and the purpose of buying it. The only way to do that is for him to imagine how his family would fare, if he were to pass away tomorrow. Wouldn't it make things difficult for his wife and parents?
Therefore, he cannot compromise with adequate insurance cover. Gautam needs to amend his approach towards insurance. He can't be sure about the length of his life. The fact is that he may be in denial about the eventuality of death.
Instead of being realistic and taking steps to safeguard his family, he is agonising over the small annual amount he will have to pay. After all, Rs. 10,000 translates into only Rs. 28 per day.
Now let's do the math and see what amount he will have to pay over 30 years. In other words, let's compute exactly how much he will pay and 'not get back' if he lives a long life. His total premium payments will amount to a mere Rs. 3 lakh! Thirty years hence, even if he were to get the same amount back, it wouldn't really be worth much, taking inflation into account.
Actually, Rs. 3 lakh paid over 30 years would only be worth Rs. 50,000 (roughly a month's salary now). Is that really too exorbitant a price to pay in lieu of his family's financial security, his peace of mind and having a back-up plan? Isn't that security a form of 'return' in itself?
This predicament is more psychological, than it is financial. For young earners like Gautam, term insurance is the most affordable form of insurance, which provides maximum sum assured at lowest possible premium.
Ensuring his family's financial security at a low cost is the 'return' offered by term insurance. Insurance is not an investment product; it is a protection instrument. Gautam must learn to separate insurance and investment, but prioritise the latter for obvious reasons.
(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.) This article appeared in Economic Times dated Jan 30, 2017, 06.30 AM IST