Life Insurance: Risk Coverage or Investment Gains

Insurance as a word is not unheard, even in the hinterlands of the country. As a concept whether people understand its meaning is a debate which needs a lot of deliberation. Let us focus our discussion on Life Insurance to start with.

Most of the people purchase life insurance products for Tax saving and few understand that it’s a cover for life. Second highest category is of the customers are in for investments and somehow buy this product given the first point that we mentioned. Children education, marriages, retirement etc. are also some of the reasons that have been seen empirically.

There are two types of Life Insurance Plan: Term plan and traditional plans.

Traditional Plans are those which have saving component and risk component. These plans are liked by people but CAGR of these plans around 6%.

Among term plans, we have a bifurcation into:

  1. Pure Term Insurance Plan
  2. Term Insurance With Return Of Premium

Let us discuss each of the above.

  1. Pure Term Insurance Plan: A form of life insurance where the insured is covered for a specific term during which if he passes away, the sum assured is payable to the nominee. If the death doesn’t happen, nothing is payable at the maturity of the policy. This plan is the most effective plan to insure life and is very cost efficient.

The challenge with this plan is that people think their money will be lost if they don’t die. There is no maturity value of the policy. This limitation is the genesis of the second plan discussed below.

  1. Term Insurance with Return of Premium: As the name suggests, the premium is returned in case the insured is alive at the maturity of the policy. Of course, if the insured passes away while the coverage continues, the sum assured is payable to the nominee.

Let us look at the numbers now. For a person aged 26 years, term 40 years for sum assured INR 50 lacs, premium will cost ~ Rs.12,000 p.a. for the second plan but if one is willing to let go of the maturity value, the premium falls to INR ~6,200 p.a. under the first plan.

Let us build on to this. The INR 5,800 of the premium saved for 40 years can be invested into a mutual fund in a SIP which, for this long maturity, can easily generate 10% totaling to Rs.2,823,740 as against the total premium returned which approximate to INR 12,000 x 40 = Rs. 480,000.

The mathematics is very clear. But above all, buying any insurance has a lot of emotions built into it. After all, man is an emotional animal.

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