The unpredictability of various life events makes buying an insurance cover an investment not to be skipped. Insurance is an investment that provides financial security to the dependents in your absence. Thus, it ensures your family has a financial safety net to fall-back on even when you are not around.
Choosing a suitable policy can often be a daunting task among the plethora of choices. Hence, getting the right policy is the first step in selecting suitable life insurance coverage.
What are traditional life insurance plans?
Traditional life insurance is the most common type of insurance plan that people at-large opt for. This plan not only provides financial coverage in the unfortunate event of death, but also a maturity benefit at the end of the policy tenure. Hence, if the policyholder outlives the policy tenure, they receive a maturity benefit. These returns can be used to meet your long-term financial goals like a child’s higher education, retirement, marriage, vacation, and more. These policies generally have a tenure of 10 to 20 years which is sufficient to accumulate substantial returns over the period.
Term insurance, on the other hand, is the purest form of life insurance coverage that is available. This policy offers financial protection to your family members at an affordable premium where the insurance company pays the sum assured to the beneficiaries in the event the policyholder has an unfortunate demise during the ‘term’ of the life insurance plan.
The age of the policyholder, the policy’s sum assured, its policy tenure, medical history and the health of the policyholder are the several factors that impact the premiums for these term insurance plans. Since term insurance plans do not offer any maturity benefit, the nominee mentioned in the policy receives the sum assured in the event of the demise of the policyholder.
Why choose a term insurance plan over a traditional life cover?
Traditional insurance plans are generally a lucrative option for the guaranteed income they offer. While traditional plans offer a fixed lumpsum amount at the end of the tenure or regular income payout at specified intervals, the amount of such payout depends on the premium that is paid. The returns in traditional life insurance plans are although guaranteed, you need to make your own calculations to know this amount. The internal rate of return for these plans are between 5.5% to 6% and is mostly tax-free.
Here are some reasons that make choosing term insurance plans a better option over traditional policies.
Prohibitive nature of premature withdrawals due to surrender charges
Traditional insurance plans are available for a period of 20 years and offer a limited premium payment, the minimum term for these plans is usually five years. In case you choose to prematurely surrender the policy, there are steep exit barriers. As per the regulator, the Insurance Regulatory and Development Authority of India (IRDAI), based on the statistics of 2018-19, the average persistency for the premium of the 61st month is just at 38.22%. This means almost 60% of the policies are not renewed by the fifth year, on average. It is due to the steep premiums that are charged in traditional policies whereas a similar coverage is available at a more affordable price for term insurance plans.
Small amount of life insurance coverage
Most traditional insurance plans are marketed as insurance-cum-investment-cum-tax-saving plans. While it may have its share of benefits, the life insurance coverage, that is, the amount paid in the event a policyholder dies is small. and thus, often inadequate. Traditional plans tend to focus on investment rather than insurance-focused policies. On the other hand, term insurance plans ensure all the premiums are used to provide life insurance coverage and the entire sum assured is paid to the nominees. Thus, financial experts recommend keeping your insurance and investment separate and prefer a term insurance policy over traditional insurance plans.
Moreover, no exemption for tax benefits will be available under Section 10(10D) of the Income Tax Act in case the life insurance coverage is less than 10 times of the traditional life insurance policy.
Some older individuals may be concerned about the term insurance age limit when it comes to choosing a pure insurance policy. Depending on the terms of the insurance company, the term insurance age limit can also be extended all the way up to 99 years. For these above-mentioned reasons, a term insurance policy is a smarter choice of insurance plan as it offers real insurance benefits for your dependents.