Does a Term Insurance Plan Count as a Good Investment?

Life insurance is of several types, each suitable to you in different ways. Term insurance is the simplest form of life insurance. You can avail of term insurance from any bank or financial institution. Before buying term insurance, you need to know about the feasibility of your investment.

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Term insurance plans are also an avenue for investment. They provide a safe environment for your money to be parked for future use. If you are someone with a limited income, term plans present great advantages for you.

What are Term Insurance Plans?

A term insurance plan is a pure life protection policy. The plan provides you financial coverage for a fixed period in exchange for a fixed amount of premium. The term period is specified in the policy at the time of purchase. If you die during the term period, the money would be paid to your family as a death benefit.

Term insurance policies provide a guaranteed payout to policy nominees in the event of your death while the policy is in force. You need to pay periodic installments of a fixed premium amount in return for the guaranteed death benefit. If you survive the policy term, no benefit would be paid. Some institutions provide term plans with guaranteed renewal features, allowing you to extend the policy term. 

Term insurance as an investment is quite beneficial in the long run. Proceeds from term insurance policies can be used to pay off other expenses and outstanding debts. You have to be extremely smart and calculative for choosing the correct term plan for yourself. 

From an investment point of view, term insurance is a reasonable life insurance option. This is because, in return for paying small premiums, you would get a guaranteed large benefit.

Does a Term Insurance Plan Count as a Good Investment?

Term insurance plans are cost-effective as they offer complete coverage for low premium costs. Another evidence of the cost-effectiveness of term plans is the tax benefits attached to them.

There are many other reasons why term insurance is a good investment.

  • Financial Security: The most apparent reason for investment nowadays is financial security. Term insurance plans offer financial security by covering your family's future expenses in your absence. It would help if you chose a term plan which is dependent upon your retirement age and health. Such plans would give you a longer-term period. Longer the term period, the higher the financial cover. This way, you would have increased financial security.

  • Low Premium Costs: Term insurance policies have low premium costs compared to other investment plans. At the same time, the sum assured is relatively high, which makes them a good future investment. Low premiums enable you to renew your policy and continue enjoying life cover security.

  • Low Brokerage Costs: With traditional life insurance, your brokerage costs can go up to 30-40% of your first premium installment. This is not the case with term insurance. Brokerage costs in term insurance are usually in the range of 5-6%. Also, if you purchase term insurance online, you do not have to pay brokerage.

  • Multiple Payout Options: Your family would receive the death benefit if you die during the policy term. This money would help them to manage their expenses after you are gone. Some insurance providers offer different pay-out options for the nominees to receive a monthly income in addition to the guaranteed death benefit. With the help of this monthly inflow, your family would manage day-to-day expenses easily.

  • Adaptability: Adaptable investments prove to be highly profitable in the long run as they provide you peace of mind. Term insurance plans provide options that are easily adaptable to your preferences. They are flexible in terms of the term period, sum assured, premium installments, and death benefit payouts. Every detail can be customized according to your suitability.

  • Additional Riders: To strengthen your investment, term insurance comes with add-on riders. You can add riders such as cover against critical illness, extra payout on accidental death, accidental disability, etc. by paying an additional premium. Riders enhance the basic insurance benefits of your term plan.

  • Tax Benefits: You must opt for investments that provide an added benefit in the form of tax deductions. Term insurance plans payments are deductible as per the Income Tax Act, 1961. Under Section 80C, the term insurance premium is exempt up to a limit of Rs.1.5 lacs per year. Under Section 10(10D), term insurance death benefit is exempt. 

  • Return of Premium Option: You can also choose a term plan with a return of premium option. Such term insurance policies charge a higher premium in the beginning but would return the premium amount at the time of policy maturity. This would be the case if you survive the entire term of the term insurance plan. Return of premium option safeguards your investment further. 

When is the Right Time to Invest in a Term Insurance Plan?

People between the ages of 18 and 65 years can invest in term insurance plans. The age differs from insurer to insurer. You should start investing in term insurance plans at an early age. 

  • Starting early gives you the benefit of longer-term periods. Long-term periods would produce higher sum assured and payout benefits.

  • If you start your term insurance investments in your early 20s, you will enjoy longer-term periods along with smaller payments. Premium installments would be at the lower end as they would be paid for a long period. This lightens the load on your pocket.

  • Most insurance providers prefer applicants who have good health. You would have an advantage over older people at a young age to be given a higher sum assured at smaller premiums.

  • People in their early 20s have fewer responsibilities and can manage their monthly expenses in less amount of money. Therefore, paying small monthly premiums is easier for them.

  • If you are unmarried, term insurance investment should be on your list. This is because you do not have dependents which let you make room for investments. Also, your expenses are less, and you can use this time to plan a financially secure future for your family later in life.

  • If you are married and have children, this is high time to start investing in term insurance. As a parent and partner, you need to keep your finances in good shape. Term insurance provides a blanket of security in the form of the guaranteed death benefit.

  • If you are above 50 years of age and are nearing retirement, investing in term insurance should be your top priority. At a time when you have completed all your family responsibilities, you must make sure that your family will not be in financial trouble after your death. Your dependent spouse must be provided with financial security and term insurance investment is key in doing so.

In Conclusion

Term life insurance plans may seem an expense initially, but they are extremely profitable in the long run. You need to choose a term plan from a recognized insurance provider. Making term insurance investment decisions at the right time is equally important as they decide your family's future prosperity.

FAQ's

  • What are the conditions in which insurance providers charge higher premiums?

    Ans. Most insurance providers charge higher premiums from people who fall under the following categories:
    • Advanced age
    • Unhealthy lifestyle habits such as drinking alcohol, smoking, etc.
    • Risk-prone hobbies such as adventure sports, wildlife exploration, mountaineering, etc.
    • Life-threatening jobs such as power line work, firefighting, construction work, etc.
    • Chronic health problems like heart diseases 
  • I am starting a new business. Would buying a term insurance plan be a profitable decision for me?

    Ans. If you start a new business, investing in a term insurance policy would be a much more economical option. Term insurance policies are cost-effective and have fewer premium costs. Also, you can use the difference from the term insurance investment for providing cash flow for your business.
  • Is it possible for me to add a rider to an existing term insurance policy?

    Ans. Yes, at the time of policy renewal, you can add riders to your term insurance policy. Term insurance does not allow rider additions during the term of an existing policy.
  • What documents would I need to apply for a term insurance plan?

    Ans. To apply for a term insurance plan, you would require the following documents:
    • Identity proof
    • Age proof
    • Address proof
    • Income proof (salary slips or bank account statements of the last 6 months)
    • Current medical reports
    • Recent passport-sized photographs
  • What kinds of deaths are excluded in term insurance coverage?

    Ans. Term insurance does not provide cover in the following cases:
    • Deaths caused by suicide in the first 12 months of policy commencement
    • Self-inflicted injuries which are a result of hazardous activities
    • Deaths caused by Sexually Transmitted Diseases
    • Deaths due to an overdose of alcohol or drugs
    • If the insured gets murdered
    • Deaths caused by natural calamities such as lightning, earthquake, tsunami, etc.

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