Should one buy term insurance or an investment plan? That is the question we all should ask ourselves before signing up for either one or both of them. Understanding the purpose of insurance and investment separately is necessary. Insurance, if we go by the real meaning, works to protect us from unforeseen events such as death. It offers the policyholders' family with a pre-opted Sum assured in case of their unexpected demise. This Sum assured takes care of all Financial needs of the family such as Rents, Loans, EMIs, Child Education etc. Ideally, Insurance is a good fit for those who have financial dependents and liabilities. So, people having dependents and financial responsibilities must buy insurance for sole purpose of protection.
Investment or a product that is a mix of both investment and insurance must also be bought but after taking into account its offerings. Product that is a mix of investment and insurance offers you income with some protection in the form of insurance. It makes sense to buy such products for your old age when you are through with all your financial and other liabilities. Meaning to say, insurance and investment have their own significance. It is difficult to manage without either one of them.
Let us understand the functioning of Insurance and Insurance-investment product through their representatives, Term insurance vs Endowment plan.
Term insurance, as the name suggests, is for a limited period, and has the least possible premium among all insurance plans. You can choose the length of the term for which you would like coverage, up to 35 years. Payments are fixed and do not rise during your term period. In case of unexpected death, your dependents will receive the benefit amount as mentioned in the term life insurance agreement. You can customize term life insurance with the addition of riders, such as child, waiver of premium, or accidental death.
An endowment policy is a combination of insurance and investment: The policyholder's life is insured for a certain amount. This life cover is referred to as the sum assured.
Some part of the premium gets allocated towards this sum assured. Another part is allocated towards the administrative expenses of the insurer. The remaining portion of the premium gets invested.
If you purchase an endowment policy and pay a premium of Rs 10,000 annually for 15 years, you are likely to get a cover of perhaps Rs 3 lakhs or so, with the amount returned after 15 years with accumulated bonus etc.
In a term insurance for the same period and same amount you are probably to get a cover of minimum Rs.15-Rs 35 lakhs. this means that in case the policy holder dies during the cover period he is likely to get a huge amount as sum insured as compared to an endowment policy, which would provide very less coverage.
It's beneficial to go in for a term insurance policy for protection purposes since it covers the death risk several times, as compared to an endowment policy. No doubt, the sum assured would be returned back in the case of an endowment policy, but the purpose of insurance is defeated as the risk coverage is too low.
Ideally Endowment plan should be opted for as an addition to a pure term plan as the cover provided in Endowment is a little less. It should be bought as an investment tool with a hope to enjoy the benefits of the plan (the original sum and the accumulated bonus) in your life time. Endowment plans prove to be quite beneficial when you retire. By buying an annuity policy with the sum received, it generates a monthly pension for the rest of your life.
Most of the insurance companies provide both a term and endowment plans. The premium for sum assured is different for various insurance companies. Tax benefits under Section 80C of the Income Tax Act are available under both the cases.
Term plans cannot be overlooked as they are purest form of insurance, providing you protection against the biggest threat/reality of life- Death. Opt for endowment plans for the sole purpose of investment and you are going to financially secured for whole of your retired life. Choice between Term insurance and Endowment cannot be made as each of them has its own significance. Buy term plan to prepare yourself for an untimely demise and also endowment for future income generation or pension.