Oct 14, 2009

Life Insurance Term Plans: Lesser-Known Facts

Photo by enggul
In my earlier post: ‘the most amazing fact about life insurance’, I advised you to go for term plans.

In continuation, this post will shed light on some lesser known details about term plans which will enable you to make a wiser decision concerning one of the most important choice in your life.

Term Insurance Policies: Lesser Known Facts

1. Why are Term plans considered as the best way to insure life?
The term insurance is designed for protection of your family. It is the best form of life insurance because the one and only purpose of life insurance is to ensure your family’s financial protection, should something unfortunate happens to you. With the death of the breadwinner of the family, an income stream also dies and proceeds from term insurance policy can replace that lost income.

Accordingly, term Plans provides you with high coverage at a very low cost. For further details, read: ‘Most amazing fact about life insurance’.


2. Why pure risk insurance plans are called term plans?
Interesting question! They are called term plans because these are offered only for a ‘definite duration / term’. But why these can’t be offered for the whole life? The purpose of insurance is to offer protection against an uncertainty. But as you know the only thing which is certain in this uncertain world is death and taxes. So, life insurance contracts offering pure life covers for the entire life (where there will be certainty of the insurance company paying up) would be an unviable / losing proposition for the insurance company.


3. Why do the insurance companies and the agents hesitate to sell term plans?
Another good question! Life Insurance Companies, like other businesses want to make a fast buck. Their self-interest (making money) comes before customer interest. Now, as investments cum insurance plans are more profitable than pure risk products, these are displayed on front shelves and advertised with a high pitch. On the other hand, Term Plans are like secret cappuccino well hidden from your eyes.

Similarly, insurance agent motto is to make hay while the sun shines (To hell with customers!) as commission earned on the insurance cum investment products is a lot higher than commission on term plans.


4. But aren’t the people intelligent enough to know which insurance policy is most suitable for them?
Actually, in this era of high decibel marketing, people get easily distracted by the high sales pitches of life insurance companies which are hell-bent on selling investments disguised as insurance.

Furthermore, most of the people think that life insurance products are only meant for tax saving and investment, which makes the job of insurance companies a lot easier. I could never understand why the government encourages people to park their money in life insurance by offering tax incentives; the only plausible reason can be to safeguard the interest of Life Insurance Corporation of India (LIC), the behemoth created by the Government of India.

The third reason is deep rooted notion that something should be received back on maturity. And on top of it, nobody wants to think of a premature death let alone planning for it. (Maut aaye mere dushan ko).

So, although life insurance is actually meant for ‘death benefits’ but people buy it for ‘living benefits’.


I’ve written this post in an attempt to make you realize that the harm caused to our financial health by life insurance industry (due to mis-selling) is similar to the harm being caused to our physical health by the processed and packaged food industry.

I hope that after reading this post at least some of you might become wise enough to understand the insurance pitfalls and start buying life insurance for the purpose of insurance only.

I’ll be covering a lot more information about term plans (including term plan FAQs and tips to remember while buying a term plan) in forthcoming posts.

Meanwhile, if you’re still not convinced about the importance of term plans as part of your financial plan, do write in the comment box.

Also see:

23 comments:

  1. Hi,

    Would like to get in touch with the blog author. Is it possible to connect with me at abitha.deepak_at_gmail.com to take this conversation further? Thanks.

    ReplyDelete
  2. Deepak: I’ll greatly appreciate if you can air your views in the comment section itself. And if required, you can write to me directly at feedback [at] themoneyquest [dot] com.

    ReplyDelete
  3. Eagerly waiting for your next post on 'tips to remember while buying a term plan'. Please do this ASAP.

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  4. TERM PLANS HAVE NO TAX REBATES.
    ROPING IN LIC IS NOT FAIR. GOVT WANTS BULK MONEY AT VARIOUS PLACES SO THAT G SEC HAVE MARKET.
    INS. COS. WASTING MONEY ON FRAMING DIVERSE PRODUCTS. REGULATOR ENSURES THAT ALL PRODUCTS CONVERGE TO SAME GAINS/BENEFITS.
    COMPLEXITY IS GIFT OF WEST TO US. WE COPY.

    ReplyDelete
  5. Dear Anonymous user,
    Who said term plans have no tax rebates. Do you work for an insurance company which provides more than 20 percent of the buyer's premium as commission for selling traditional plans??? If you dont know pls dont misguide.

    ReplyDelete
  6. I really like your all blogs..I really Appreciate your efforts to improve understanding of people.Regarding Term Insurance, I am also spreading awareness among friends and family member..I also like to add info regarding PURE ACCIDENTAL INSURANCE - Which can be claimed in case of death in accident only and comes with 50%less premium of Term insurance.you must be knowing more for sure..do you think we should have both TERM and ACCIDENT insurance together for the age 25-45??

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  7. Vishnu: Yes, definitely. As already stated by me in an earlier post "5 Common Insurance Myths", personal accident insurance cover is a lot more important than term insurance particularly for the young people.

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  8. Thanks for ur comments.Have you write any post for balanced portfolio which talks about Term Insurance+Accident Insu. + some MF + Some MF-ELSS + Some GOLD...if so please update me..Do you have any logic for how much SA we shld have in Term Insu?

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  9. Vishnu: Not yet! You’ll have to wait.

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  10. Good Post !!!!
    Was always aware of Term Plans and why agents never want to sell those !!
    Am 24 and will get a Term plan soon, any suggestions on which are good?

    ReplyDelete
  11. Suman: To know the best term plans, you need to wait for some more time.

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  12. can i take two to three term insurance policy say one from sbi, second one can be from birla and third can be from hdfc??Is it advisable to do so?

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  13. Good one !!
    Actually it will great if you give a demonstration of Rs X investeed in some moneyback insurance product with say Y insurance coverage & Z returns . If the same Rs X is invested in a term insurance product with Y insurance coverage along with some dept/equity fund . Return from dept/equity fund will be way ahead of Z .

    ReplyDelete
  14. This is a very informative and realising facts about objective of Insurance.
    Appreciate the efforts in sharing the knowledge.

    ReplyDelete
  15. Hi,

    I bought a LIC Jeevan Saral Plan last year. I am paying a premium of 5000 p.m. for it. Cover is of 12.5 Lacks. I am not very sure about continuing this plan after seeing the good returns offered by MF. Can you please guide me on this. Should i continue this plan which is expected to give modest returns or shall i switch to MF and buy a term cover.

    ReplyDelete
  16. AnonymousMay 26, 2011

    Hi Fischer,
    Great work for spreading awareness is done by you, followers are following it. You may till now have got it.
    I have one question. Can I have 3 same term policies of same company at a same time?

    ReplyDelete
  17. As usual, a fantastic post - keep going! I’m saying thanks from the thousands who enjoy your blog and don’t say anything!

    ReplyDelete
  18. I really love your writing, unlike most blogs I actually learn things, find the content useful and it’s well written. 11/10 every time!

    term insurance

    ReplyDelete
  19. What does it mean by POLICY ANNIVERSARY, does it mean every year ?
    "Increasing Sum Assured" : On every policy anniversary, your sum assured will increase by 5% or 10% of the initial sum assured without any increase in your premium amount.

    ReplyDelete
  20. Really a very good website.
    Worth praising.
    Nice articles on every page.
    Raj Kumar
    Haryana

    ReplyDelete
  21. Hey fisher,

    I have a dilemma in understanding whether to go till age of retirement or till the max provided, which i find as 75yrs by Aegon religare.

    As i understand, till one's retirement age, his family is dependent on him and thus the need of insurance. After that probably one has cleared all his liabilities.

    Also paying premium after the retirement age would be a burden on your retirement savings.

    Finally, a simple calculation that i did for 1Cr S.A for 2 tenures, one till 60 yrs and one till 75yrs, the figures were surprising.
    The total amt paid per year is Rs8331 and considering mere 8% growth rate, the amt for 60yrs comes out to ~12L (pretty decent amt for 1Cr SA) and for 74 yrs it comes out to be ~45L, which in my opinion is big amt.

    I have put my thoughts and confusion. Anybody having any take/experience please comment.

    ReplyDelete
  22. Hey fisher,

    I have a dilemma in understanding whether to go till age of retirement or till the max provided, which i find as 75yrs by Aegon religare.

    As i understand, till one's retirement age, his family is dependent on him and thus the need of insurance. After that probably one has cleared all his liabilities.

    Also paying premium after the retirement age would be a burden on your retirement savings.

    Finally, a simple calculation that i did for 1Cr S.A for 2 tenures, one till 60 yrs and one till 75yrs, the figures were surprising.
    The total amt paid per year is Rs8331 and considering mere 8% growth rate, the amt for 60yrs comes out to ~12L (pretty decent amt for 1Cr SA) and for 74 yrs it comes out to be ~45L, which in my opinion is big amt.

    I have put my thoughts and confusion. Anybody having any take/experience please comment.

    ReplyDelete

You’re welcome to post a comment if you’d like to air your views, or if you’ve any further question to ask, but please stick to the topic and don’t forget to write your name.