January 30 , 2013
When you hear the word 'life insurance' what's the first name that comes to your mind? Jeevan Anand? Jeevan Saral? Most people would think of an endowment policy or a whole life policy and never a term policy. Some might be baffled to read that there are insurance products that do not pay anything, do not even return the premiums, unless the insured person passes away within the policy term. We assert that such Term Policies are the only type of insurance policies one should ever buy.
If you find this hard to agree with, some bit of unlearning is required.
The purpose of life insurance is to cover the risk of loss of potential income in case the primary breadwinner is no more. The concept is somewhat like this: a large number of people make small contributions which are pooled and given when one of those people lose their income-earner. Individual contribution depends on how much they want to receive if they themselves become eligible. Since nobody knows when death might occur it makes sense for every earning person with dependants to contribute and be part of the pool.
Term insurance pays the chosen lump sum amount on death and nothing otherwise. Premia are comfortably affordable and it is the cheapest way to be adequately insured. Premiums of traditional or ULIP policies are several times higher and you end up being grossly underinsured since part of premium in non-term policies goes to mortality charge (that's the insurance part) and the rest to a fund managed by the insurance company.
Insurance term needs to last only as long as one expects to earn. Since you would stop earning after a definite period you don't need insurance to last a lifetime. Post retirement, funds are supposed to come from your investments.
But aren't non-term plans that combine insurance and investments 2 birds at 1 shot? Without getting into details of numbers it can be vouched that in most cases they don't even make for half + half a bird. Insurance cover is minimal- about 20 times the premium and returns earned are much lesser than what you might have earned had you invested in a FD or in mutual funds directly. Insurance and investment needs should be addressed separately and not with a 2-in-1 product.
Every life insurance company has at least one term product. The agent might have never told you about it or maybe even tried to play it down since he earns least commission on it. Don't be mad at him.
Firstly get adequate cover through an online term policy. Depending on the surrender value of your non-term policies it might still be wise to quit them and move funds to core investment products. If needed get an expert's advice on how you can correct your insurance errors.