Well lets start with a very basic question? Why do we take insurance policies? Is it for insurance sake ie cover the risk of loss of the asset insured, or is it for investment? Or is it for both? The answer to this could be all three.There are people who buy it just for insurance sake, while some buy it for investment purposes, while some others see it as both as an investment and insurance tool.
So which is the right way of approaching insurance? Friends, insurance polices are meant only for insurance sake and NOTHING else. Get this very clear. It is NOT an investment tool, at least not an effective one.
So first thing to do is to buy insurance only for insurance sake. And one must have insurance in his portfolio as it is the most important hedge against any eventuality that might rock your finances. Now, that its clear that we need an insurance plan which actually serves to meet the "insurance" promise, which policy should we go for? Basically there are only 2 types of insurance plans ie. Endowment and pure term plans. The plan to go for is TERM INSURANCE only.
Term Insurance is the basic insurance policy which seeks to provide life cover to the subject insured at a very nominal premium without offering any survival benefits.Some people might ask this: Now if it does not provide survival benefits, how is it better? Do not we end up losing all the money we paid if we were to survive? Lets try and understand the reasons why term insurance is the only insurance plan you will ever need to buy.
1. Meets the need for life cover at the lowest possible premium – Term plans offer you life cover at much lower premiums as compared to endowment plans. For example,
LIC Anmol Jeevan Term Plan, the premium for a 30 year old male, SA of RS 20lakhs and for 20 years is Rs 7578 annually. While if the same person was to take endowment plan of Rs 20 lakhs the premium would be Rs 95910.Need I say more? Just see the difference.
2. Lower charges than Endowment Plans – The largest disadvantage with endowment plan is its ridiculously high cost structure. Conversely, the largest advantage of term plan is its low charges. Endowment plans may eat up to 50-60% of your premium as charges in the first few years and subsequently too the charges are higher as compared to term plan. These charges are taken in the name of mortality charges, admin charges, fund management etc. The biggest reason for this is that they have to pay huge commission to the agent selling you endowment plans. You can avoid paying such high charges by buying term plan. Simple.
3. Lets you play "Buy Term and Invest Rest Strategy" – In the beginning of this post, I stated that its not wise to look at insurance plans as an investment tool and the reason for this is that there are better investment options available in The market which give far superior returns than any insurance plan will ever give.So for all those wanting to have insurance for myself and also get some returns the option is to play "Buy Term and Invest Rest Strategy". For example, in the earlier example if a 30 year male wants 20lakhs worth cover, he could buy LIC term plan for RS 7578 and invest the difference (Rs 95910-7578) Rs88332 in any good equity diversified fund which will give at least 15- 18% returns over 20 years if not more. No insurance plan can ever give you better returns than well diversified equity fund. Few of the good equity diversified mutual funds are Reliance Growth Fund, HSBC Equity, Sahara Growth etc.
So friends, my advice to you is that you MUST buy insurance for self and others and with insurance I off course mean Term Plan ONLY.