What Kind Of Life Insurance Cover Should You Get?

The writer is a Delhi, India based Certified Financial Planner CFPCM, conferred upon by the
Financial Planning Standards Board. If you are an Indian resident looking for a financial plan prepared according to your needs & goals, write to her at shruti(AT)richesawait.com

what life insurance plan is best for meInsurance means protection and it’s only role is to cover the risk, we all know that. But a majority of Life Insurance covers in India are bought more for investment or tax saving reason instead of protection.

By mixing insurance with a goal to invest and grow money, people end up failing in the purpose of both – insurance (low sum-assured) and Investment (low returns). And not to forget wasting money on higher premiums.

Let us try and understand the reason behind this common but critical mistake of clubbing two of the most important but entirely different issues of insurance and investment together.

In India there are basically two kinds of Life Insurance covers available:

  1. Insurance-only Policies
    Term Plans are the only pure form of life cover policy. In this, your family will get the planned amount of Sum Assured in event of your death. In other words, it is the life insurance policy with a no-frills life cover. And because of this no-frills element, they are the cheapest, offering low premium and high sum assured, and most practical insurance option available. As it will help in fulfilling the point of taking insurance by providing adequate cover at a reasonable price for your family
  2. Insurance + Investment Plans
    These plans provide money in case of death as well as on surviving the tenure of the policy. This has two components, (a) Life Cover & (b) Investment Component. This means that you have to pay a higher premium for this as compared to term plans, as some part of the premium paid by you goes towards life cover and the remaining part is invested as savings mainly in debt or other fixed-income securities. This results in you paying too high a premium for a low cover amount thereby leaving you under-insured. Also, from an investment perceptive they provide very low returns (considering the long tenure of the policy) as compared to other investment options like Mutual Funds. There are different kinds of such policies available like Endowment Plans (Life Insurance contract designed to pay a lump sum on its maturity or death) and Money Back Plans (provides life coverage during the term of the policy and the maturity benefits are paid in instalments instead of lump-sum by way of survival benefits in every 5 years or so), etc.

Now, the logical choice of insurance should be term plans. Still, a lot of people go for Insurance + Investment Plans instead of Insurance-only policies. Mainly due to the following reasons:

  • Lack of Knowledge
    Many people are not even aware of Term Plans because these policies are not promoted as widely or frequently as endowment or money back plans. Also, insurance agents are much more interested in selling an endowment plan because of higher commissions. Therefore, people end up buying a costly and wrong policy as they are not made aware of a better alternative.
  • Element of returns
    Most people generally consider Term Plan Policies as a waste of money since they would not be getting any return on their money on maturity of the policy & prefer buying other costly plans like endowment because they provide something in return on maturity. They forget that insurance is not meant for them but their loved ones. Insurance is not an investment instrument meant to provide returns. Its purpose is to provide an adequate risk cover or protection to your family in case of your death. This is possible only with term insurance as they are low-cost high-risk plans
  • Convenience Factor
    Since endowment type policies are mostly promoted as vehicles for saving or investing money for retirement people assume that this is the perfect ready-made solution to both their insurance and investment needs. And they don’t have to spend time or energy searching for other avenues. But in reality, given the fact that the premiums are high and sum assured received is low, the whole purpose of life insurance gets diminished. Also, returns offered by endowment plans are very low considering the high premium paid for them for a tenure of 10-20 years.

It is important to understand that insurance and investment are two entirely different things. And neither one of these should be compromised just because of convenience.

The way to fulfil both these needs is to treat them separately. Opt for a Term Plan for insurance and for the investment you can choose from PPF, Mutual Funds etc. Let’s understand this with the help of an example:

If you are a 30-year-old male and you want an insurance cover of 50 lakhs for 35 years, you can go for endowment plan like New Endowment Plan of LIC and pay ₹1,34,868 annually. Or you can go for Amulya Jeevan 11 term plan from LIC and pay only ₹16,048 annually and invest the remaining amount of ₹1,18,820 in other financial instruments like PPF or Mutual Funds. These instruments will give you exponential returns, probably in double digits every year.

At the end of 35 years, on survival, you would have paid around ₹47 lakhs under the endowment plan and you would have received ₹50 lakhs. If you had invested in the second option (term plan + mutual fund) you would have paid the same but assuming your chosen mutual fund gave out 9% per annum you would end up with around ₹2.7 crores! By selecting the second option you are insured for ₹50 lakhs plus you grow your investment corpus considerably over the period of time.

If you are unsure about how to calculate the correct amount of insurance cover for you, this article will help.


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