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. The unpredictability of various life events makes buying insurance cover an investment not to be skipped.
Choosing a suitable policy can often be a daunting task among many choices. Hence, the right approach is the first step in selecting timely 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 provides financial coverage in the unfortunate event of death and a maturity benefit at the end of the policy tenure. These policies generally have a term of 10 to 20 years, sufficient to accumulate substantial returns. 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.
On the other hand, term insurance is the purest form of life insurance coverage 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 policyholder’s age, the policy’s sum assured, its tenure, medical history, and the policyholder’s health are the 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 policyholder’s demise.
Why choose a term insurance plan over a traditional life cover?
Traditional insurance plans are generally a lucrative option for their guaranteed income. While conventional plans offer a fixed lumpsum amount at the end of the tenure or regular income payout at specified intervals, such payout depends on the premium paid. The returns in traditional life insurance plans are guaranteed; you need to make your calculations to know this amount. The internal return rate for these plans is between 5.5% to 6% and is mostly tax-free.
Here are some reasons that make term insurance plans better than traditional ones.
Prohibitive nature of premature withdrawals due to surrender charges
Traditional insurance plans are available for 20 years and offer a limited premium payment; the minimum term for these plans is usually five years. There are steep exit barriers if you choose to surrender the policy prematurely. According to the regulator, the Insurance Regulatory and Development Authority of India (IRDAI), based on 2018-19, the average persistency for the premium of the 61st month is just 38.22%. This means almost 60% of the policies are not renewed by the fifth year. It is due to the steep premiums in traditional approaches, whereas similar coverage is available at a more affordable price for term insurance plans.
A 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 if the life insurance coverage is less than ten times the traditional life insurance policy.
Some older individuals may be concerned about the term insurance age limit when choosing a pure insurance policy. Depending on the insurance company’s terms, the term insurance age limit can extend to 99 years. For these reasons, a term insurance policy is smarter as it offers real insurance benefits for your dependents.