Life Insurance! An inevitable, vital component of all well thought out, carefully designed financial plans! Insurance plans are essentially of two types – endowment insurance plans and term insurance plans.
Endowment life insurance policies are ones that promise some returns when the policy expires. These are also known as cash value policies. These policies provide insurance coverage on the life of the assured as well as pay maturity proceeds that have accumulated over the term of the policy at a specified rate of return.
Thus, life insurance policies with endowment benefits serve as insurance plus wealth creation tools albeit with a price. The price in this case are higher premiums, a part of which will go towards covering the life risk and the other part will be invested by the insurer to generate the corpus for the endowment benefit.
But can everybody afford to pay this price i.e. higher insurance premium? Let’s consider this scenario: You have recently started your family; you are the sole breadwinner and you are a proud father of a newborn. Having been in a job for only a couple of years, your income level doesn’t permit you to allocate more than a specific sum for investment purposes. Expenses are also rising now that your little bundle of joy is here.
Now, you feel an enormous responsibility of not only providing the best for your family in terms of medical care, education and overall standard of living but also allow them to sustain the same lifestyle if some unfortunate event befalls, like death or disability. How would you fulfil this responsibility?
The solution for your problem is Term Insurance Plan. It is a low cost insurance option that you must choose during the initial stages of your life and financial planning. The highlights of a term life insurance are as follows:
- Term insurance policies are generally for a period of 20 to 30 years.
- The annual premium is very less, especially when compared to endowment life policies.
- Term insurance is a very simple, straightforward policy. It covers the life risk of the assured and promises to pay the beneficiary a specified sum of money in the event of death of the policyholder.
- The earlier you take out a term insurance policy; lower will be the premium even for larger sum assured as age is a critical factor in determining the premium. Younger people end up paying smaller premium for the same amount of sum assured as against person older to them. This makes it an ideal early investment tool.
- Term plans do not give any maturity proceeds at the end of the policy term. The policy simply expires.
For example, you have bought a term insurance policy for 20 years, the sum assured under which is 20 lakhs rupees. The annual premium in this case would be Rs. 5000 (this will be decided keeping in mind your age, annual income, policy sum, your medical condition etc.) In case of death within next 20 years i.e. during term of the policy, the insurance company will pay the beneficiary (your wife or your child) the sum assured (Rs. 20 lakhs).
This makes term insurance a very effective investment strategy to take care of the future of your children while they are still minors and dependent on you. A lump sum receipt of insurance money ensures their financial security in your absence. Nothing can fulfil the emotional void, but you would have assured a financial safety net for your family during such difficult times.