Should You Go For Term Insurance, If Yes, What Should be the Policy Duration?
Written on Friday, March 17, 2017
By Mitali Sharma
Planning to take a life insurance to secure your families? What have you chosen 'Term Insurance' or 'Endowment Insurance'? Anyone who is planning to get a life cover must know the difference between the two. 'Term Insurance' is the pure life cover, whereas 'Endowment Insurance' is a life cover integrated with the saving component. In this blog, you will read more about 'Term Insurance' because it is a more cost effective option but before that, you must understand the difference between the two.
Difference Between Term Insurance and Endowment Insurance
'Term insurance' ensures the life of the policyholder for a certain period of time, like 10 years, 20 years or 30 years, as chosen by the policyholder. If the policyholder expires within the policy term period, then his family will get the sum assured but if he survives the term period, then no profit payouts will be made to him. Term Insurance is an affordable option for ensuring the financial security of the family members in face of life adversities.
Even in case 'Endowment insurance' the family of the policyholder gets the sum assured if anything happens to the policy holder. But endowment plan has the saving component integrated into it, means if the policyholder survives the policy term period, then he gets maturity benefit payouts. Endowment plans, being the mix of both insurance and savings, are preferred by many but these are way expensive in comparison to 'Term insurance.'
More About Term Insurance.
The point of attraction for term insurance is its affordability. You can get a coverage of sufficient sum assured even at a low premium. For example, a term policy worth annual premium of Rs 10,000 for 15 years, can give a cover of minimum Rs.15-Rs 35 lakhs, whereas an endowment plan with the same premium and for the same period will give a cover of only Rs 3 lakhs approximately. So the difference between the two types of plans is huge in terms of affordability.
'Term Insurance' is a good investment avenue considering its low premium and higher life cover. It should be seen as a pure security product for the family and not as a saving or profit making the investment. Term insurance provides a wider security to your family that too in a cost effective way. After getting this peace of mind, you must look for other investment avenues that have the potential of wealth creation through higher return rates.
What Should Be the Duration of Term Insurance?
Once you have decided to take a term insurance, the next important aspect is to understand what should be the duration of your insurance plan. Many would recommend you that taking a term policy of 30- 40 years is effective as it ensures that your family will get coverage for maximum time frame.
However, the best way to judge the duration for your term insurance is to know and understand how long will you take to fulfill your financial goals. You need the insurance coverage for your family till you have not achieved your financial goals. Your family's financial dependency on you keeps on decreasing as you eventually achieve your financial goals like the house, children education, marriage, loan settlement, etc., and thus the need of term insurance also reduces.
For example, if you are 30 years old today and you take a term policy of 40 years, means you are insuring yourself till the age of 70 years. But most likely, you will achieve your life's financial goals by the age of 40-50 years. By then even your kids are likely to become financially independent. Thus, for you, having a term insurance post the age of 50 makes less sense, rather you should be more concerned and focused on creating a good retirement corpus to support your and your wife's lifestyle needs in your retirement days.
In nutshell, since 'Term insurance' is not a saving oriented investment, so there is no point of making it very long term. You first need to analysis how long will you take to achieve your financial goals and for that time frame you can take a 'Term insurance' as a backup security for your family.
The premium for term insurance increases with the duration of the policy term. Thus, for taking a life-long cover, you have to pay heavy premiums. Therefore, it is better to decide the duration of your term policy as per your needs. This way you will save yourself from paying extra premiums and can invest your saved amount on your retirement planning.