Is Insurance an Investment or an Expense?

Mumbai-based Aditya (33) and his wife Tina (31) are discussing their financial plans. Aditya is convinced about buying a term plan while Tina is not sure as to why a term insurance is necessary. She sees it as an avoidable expense, especially because there is no maturity benefit.

Let us see how the discussion pans out.

Aditya: Tina, I have learned that a term plan is the most comprehensive form of financial protection. It offers a large life cover for a small premium. I think it makes a lot of sense for me to get a term insurance plan.

Tina: Really? Is term life insurance a good investment? Say you invest Rs. 10,000 a year, how much money will we get back? And, in how many years?

Aditya: Oh, no. Understand that a term insurance is a pure protection plan. This means that I pay a premium for a fixed number of years, say 30 years; and get a life cover for that tenure. If something happens to me during that period, you, my nominee, which will obviously be you, will get the cover amount as the death benefit. Otherwise, once the term ends, we won’t get anything.

Tina: What? Do you mean we pay so many premiums and not get anything in return? How does that make any sense? Why not put the money in a fixed deposit or a recurring deposit?

Aditya: I understand how this seems. But you must think about financial risks. Term insurance is like a shield. Imagine that even if we got back all the premiums paid after 30 years, what good will it be? At that time, it won’t even last us 3 to 4 months!

On the other hand, a term plan will pay you the promised money in case of my sudden demise, anytime during the entire policy term. This means that even if I am gone after paying few premiums, the entire sum assured of Rs. 1 crore is paid to you. Now does that sound too bad?

Tina: Oh! Okay. But what are the chances of something like that happening? Are you not being too pessimistic?

Aditya: Well, of course, I am hale and hearty today. But life is uncertain and I don’t want to leave anything to chance. What if something happens to me? With term insurance, I am at complete peace of mind. I will be assured that even if I am not here, you will have enough money to take care of yourself and our beloved family. A term plan is not very expensive and once we avail the plan, the premium does not change for the entire term.

Besides, don’t consider it an expense. The peace of mind, convenience, and financial security that it provides us, is worth much more than a few thousand rupees a year. A suitable cover will help you meet all types of outflows, from household expenses to rentals, from EMI to school fees for our kids.

Tina: Okay! I understand this now. I always knew you were smart. You have busted my myth that term insurance policies are an expense. But have you done enough research about which term plan you want to buy? As I understand, there are ‘n’ number of options out there.

Aditya: That’s true but I’m already done with the research part. I’ve been doing that for the past 2-3 days and finally I’ve decided to buy Edelweiss Tokio Life Zindagi Plus.

Tina: I see. Why did you go with this one?

Aditya: It has a number of unique features apart from a base term plan. I’ve opted the ‘Better Half Benefit’ and the ‘Top-up Benefit’. Under the Better Half Benefit, in case of my demise within the policy term, apart from the base sum assured, a life cover will start in my wife’s name that is you. The life cover will be 50% of my life cover or Rs. 1 cr., whichever is lower. Under Top-up Benefit, my life cover will increase every year by either 5 or 10% depending on what I choose. I think I’ll choose 10%.

Tina: Oh, that sounds really good! I don’t think I’ve ever heard of a term plan with such features, Aditya!

Aditya convinced Tina about the importance of term plans.

Some more common questions regarding term policy are covered here:

What are the types of death covered in term insurance?

Term insurance covers natural, accidental death, or death due to some illness. Moreover, best term insurance plans also offer additional riders. Some riders allow additional payouts to beneficiaries on account of an accidental death of the insured.

Are long-term insurance benefits taxable?

No. Life insurance products offer tax benefits as per prevailing tax laws.

Are term life insurance policies renewable?

Term life insurance policies are a contract between the life insurer and the policyholder. Once the policyholder stops paying the renewal premium, the contract ceases to exist.

From Aditya and Tina’s conversation, we can infer that the term insurance plans are not an expense but a safety shield against life’s uncertainties and a wise financial decision.