Both the term and traditional insurance plans cover the risk of premature death. (Representational pic)
Insurance is a risk mitigation tool. It compensates against the financial loss suffered in case of premature death. There are many plans available that help in fulfilling your life goals effectively. In recent times, term insurance plans have become extremely popular. People are attracted to term plans over traditional life insurance policies. There are many factors why financial advisors and insurance companies are aggressively suggesting customers to go for a term plan.
Both the term and traditional insurance plans cover the risk of premature death. The only difference is that while traditional plans promise benefits even after maturity, term plans don't pay if a policy holder survives the period of the policy. However, several companies offering term plans have started returning the premium to a policy holder if he/she survives the policy period. But the basic difference and why term plans are so popular is that the high sum assured at very low premiums which could meet your family's financial need in your absence.
Term Insurance Benefits
A term insurance plan is of three types -- one-time premium payment (the premium is payable as a one-time lump sum payment); partial premium payment term plan (premium amount is paid in partial terms); a regular premium payment term plan (premium amounts are paid in regular intervals). Besides, some companies offer the option of choosing a return of premium clause. For an ROP plan, the premiums are quite higher than the three others. In ROP, the subscriber is paid the premiums that he/she has paid to the company, after maturity. However, this is not in the case with the three others, and therefore, the premiums are very low and the coverage is very high.
Life Insurance Plans
In a life insurance plan, the insurance company returns the premium with interest and a bonus, if any, to the policy holder if he/she survives the policy period. However, the premiums are much higher and the sum assured is also less than what term plans promise. There are four types of popular life insurance plans -- money back plans (company pays a part of premiums at regular intervals and a lumpsum is paid after the maturity); unit-linked plans (these plans are market-linked with varied fund options); endowment plans (company promises a guaranteed payout); whole life plans (company promises cover up to 100 years with the sum assured payable to the nominee after the death of the policy holder).
Things to remember before you buy a policy
According to Rajan Pathak, co-founder of Fintso and a license holder investment advisor, it is not advisable to buy any insurance policy for investment or achieving any financial goal or purpose to save taxes only. He said an individual should keep in mind the cost to buy risk; maximum cover of important liabilities; financial impact while buying an insurance policy.
"Excited typical agents sometimes try to sell traditional plans showing very high returns like 8% or more to lure investors. But an investor should not fall prey to such a false high return promise. Any traditional policy (non-ULIP) giving more than 4-5% p.a. returns in today's times is not a right expectation," he said,
So, before you buy any life insurance plan, it is advisable to recheck with the company about the benefits of that policy or your financial advisor.
Barring the ULIPs that are market-linked instruments, the other three plans promise four to six per cent returns yearly and that too at a very high yearly premium, Rajan said, adding that it is recommendable to buy a term plan for which you a very small premium and get a high-risk coverage.
"Buying a term plan is always a wise decision and that too online, because firstly, term insurance is the cheapest and buying it online gives a further discount of 25-40% in every year premium. Secondly, you can buy higher risk on very low premium," he said.
For example, if you are a 35 to 40 years old individual and assuming that you will have Rs 1 crore liabilities or burden in the future which your family will need in your absence, the premium of a term plan will be much below than a traditional insurance plan's.
Term plan vs traditional insurance policy
The table shows the difference that on the same risk cover one needs to pay a huge premium for a traditional plan compared to a term plan. This is why, he said, a term plan is far superior to a traditional plan.
"A term plan promises higher risk coverage on low premiums. The premium difference can be used for wealth creation. With this combination, an individual can increase risk cover and build wealth for the future," he added.
(Disclaimer: This article is only for information purposes. Subscribers should seek experts' advise and read insurance documents carefully before buying a plan)
