Life Insurance Term Plans: Lesser-Known Facts

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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:

1. Direct Tax Code: Encouragement to mis-selling of Life Insurance

2. Understanding Life Insurance: Ask Yourself a Few Questions

3. Term Plans: FAQs