Imagine constructing a house strong enough to protect the family. You erect strong walls, install a sturdy roof, and shut the locks every night. You do so to ensure the people you love stay safe, protected, and comfortable irrespective of what transpires outside. Insurance operates in the same manner for the family finances. It acts as an invisible shield that keeps the family safe when life takes a different turn.
However, while searching for the appropriate shield in India, you may stumble upon two similar terms: life insurance vs. term insurance. Both these options are used for a similar purpose; however, they differ significantly to provide varied benefits. Understanding the major differences between life insurance vs. term insurance in India is one of the most vital financial decisions for the family’s future. Let’s take a closer look at both the options in detail:
Understanding Traditional Life Insurance in India
In India, insurance has always been viewed as a savings mechanism. The term “traditional life insurance” is associated with standard life insurance plans, including endowment plans or money-back policies. A traditional life insurance plan combines two features in one go: financial protection for the family and building savings over the years. The moment you pay your regular premium, which is the amount paid to the insurance company every year, the premium is segregated into two halves:
- Protection Portion: A fraction of the premium is used to build a cash safety net that comes into play if the policyholder dies;
- Savings Portion: The remaining portion of the premium is invested on behalf of the policyholder to build substantial savings by the end of the term.
Since a good chunk of the premium is directed towards the savings portion, the traditional life insurance policy provides guaranteed money back on maturity. This means if the policyholder survives the term of the policy, the insurance company pays out the accumulated money along with the additional bonuses. On the other hand, in case of death, the family gets a promised sum to support them.
For the typical middle-class Indian, the assured money on maturity seems enticing. It is a disciplined way of saving for the long-term financial goals, including their children’s higher education or marriage, while also providing a certain level of protection to the family. However, the two-in-one approach of traditional life insurance has its own disadvantages; these policies require that the policyholder pay very high yearly premiums for a relatively low total amount of protection.
What is term life insurance?
On the other hand, term life insurance is about pure financial protection with no frills or extra features. When buying a term life insurance plan, the policyholder selects a period of time (say 20, 25, or 30 years) and pays an affordable premium every year. In case of the untimely demise of the policyholder, the entire sum of money is paid to the family.
The money paid out by the insurance company acts as a lifeline to the family, helping them to continue to manage the monthly expenditures, repay their loans (say mortgage or car loan), pay off their children’s school fees, and much more. The best part about the term plan is that it does not have a savings component.
Since the insurance company does not have the responsibility to build up the savings for the policyholder, the cost of the term plan is unbelievably low. A young working individual in India can easily get a very high protection cover by paying a meagre premium every month or every year.
Comparing the Real Value and Benefits Offered by Both Plans
Let’s understand the value offered by both the plans to understand what is the best fit for the family and for the individual’s budget: Assume that the individual has a budget of, say, ₹50,000 to be spent every year on insurance.
If this individual uses this money on a traditional life insurance policy, the insurance company might provide the coverage of ₹10 Lakhs to ₹12 Lakhs with a promise to pay back the money with interest after 20 years. However, if this individual dies tomorrow, the family will receive the stated amount of money. Is ₹10 Lakhs enough to manage the monthly household expenses or pay off your home loan, car loan, and education loan and secure the children’s future for the next 15-20 years? With today’s inflation in India, ₹10 Lakhs would vanish into thin air.
Now, what if this individual buys a term plan to cover his life insurance needs? A fraction of the budgeted ₹50,000 (say ₹10,000 to ₹15,000) can be used to build a substantial cover of ₹1 crore. The remaining budget of ₹35,000 could be invested in better-performing financial instruments in India, including Public Provident Fund (PPF), equity mutual funds, fixed deposits with banks, etc.
By segregating the life insurance needs and investment needs, the family gets maximum protection through the term plan while also allowing for faster growth of the remaining money through quality financial instruments.
Which Plan Provides Better Protection to Indian Families?
By evaluating the scope of protection, it is evident that the term “life insurance” provides the best value. With traditional life insurance, the policyholder only gets adequate financial protection against the financial loss caused by his/her demise for a limited amount of time (usually 5-10 years).
An Indian family is typically a nuclear family with multiple people depending on the key earner. Losing him/her can immediately impact the family’s ability to manage their daily needs. Insurance should be bought only for the purpose of financial protection as a failsafe mechanism to ensure the family can pay off their home loan, car loan, and other outstanding dues, while also continuing to meet their basic monthly expenses and provide the children with quality education and a decent lifestyle.
Term insurance offers the highest amount of financial cover for the lowest premium. It ensures that even if the breadwinner is gone, the family can comfortably make ends meet and fulfil the family’s aspirations. Traditional life insurance plans focus on the aspect of slow and steady savings with no sufficient amount of financial protection.
How to Identify the Option That Suits an Individual Family’s Needs?
Every family differs in their needs, and therefore understanding their requirements is imperative in ascertaining which plan fits better. Here are a few guiding pointers that help understand which plan suits which kind of individuals/families:
Look at the Current Needs and Responsibilities
If the individual has major responsibilities currently, an active home loan, elderly parents depending on him/her, or children who require a lot of expenses, he/she should think to get maximum protection cover as early as possible through a term plan.
Evaluate the Existing Savings Mechanisms
If the individual is good at managing their finances and has a healthy savings mechanism in the form of mutual funds, stocks, real estate, or government savings schemes, he/she does not need traditional life insurance to act as their bank account. Buying a term plan to cover potential life insurance needs while managing the rest of the investment portfolio independently is a much better option.
Keep in Mind Budget Constraints
For young earning members or couples or families on a tight budget, term plans can be a perfect budget-friendly solution. Term plans provide the best value with full-fledged life cover.
Conclusion
At its core, insurance is not meant to create rich people but to protect the family from becoming poor. For almost every Indian family, it makes much more sense to start with a comprehensive term life insurance plan, as it ensures that their financial goals for their family’s future will never be at stake. Once they have secured this ultimate safety net for their family, they can channel their savings into wealth-building financial instruments to achieve a stress-free and bright future.
