Term Insurance – Investment or Expense?
Term life insurance is a contract between an insurance company (insurer) and an individual (insured) wherein the insured pays a certain sum called premium to ensure financial security for his beneficiaries over a specified time period. A conversation between two work colleagues can help you understand why you need term insurance.
Rahul, aged 32 and his colleague from work, Sanjay aged 29 are life-long friends. Rahul has invited Sanjay over for dinner and are in the midst of a brainstorming conversation surrounding financial planning. Rahul has opted for a Term life insurance and is sharing with Sanjay, the various benefits of having one. Sanjay on the hand is not entirely convinced that term insurance has a role to play in his financial portfolio and regards it has an unnecessary expense. Let’s take a look at how the discussion between them progresses.
Rahul: Sanjay it’s commendable that you have decided to give financial planning a thought. However, I can’t help but notice that you have excluded term insurance from your portfolio. Any particular reasoning behind this decision?
Sanjay: To be honest Rahul, I think term insurance is a needless expense. Why should I pay, say 5-10 k a year knowing that I won't even get anything back at the end of the term period? How does that make any sense?
Rahul: I understand the reason behind your skepticism but there's more to term insurance than meets the eye. You’re wrong in assuming that you’re not getting anything in return. The idea of putting aside funds for a possible future use might sound unattractive but it does come handy.
Sanjay: So, you're trying to say I should invest in a term insurance plan now so as to safeguard my future? Who can predict the future though and what if the need never arises? Besides, I could always invest the same money in a fixed deposit and at least earn a reasonable amount of interest on it. That could help me if I fall into financial difficulties.
Rahul: Sanjay, I am sorry but your reasoning is incorrect. Term insurance is not just for you, it's for your family as well. Like you said, the future can't be predicted and that's why it's so scary. If something untoward were to happen to you, how would Priya (Sanjay’s wife) and Rashmi (Sanjay’s 4-year old daughter) cope without you?
Sanjay: But that’s the reason why I am putting aside a certain portion of my income into a fixed deposit account so as to protect them from such scenarios.
Rahul: A lot of individuals fall into the trap of making the same financial mistake. Sanjay, have you taken inflation into account? Even if you invest, say, 20,000 a year into a fixed deposit account for a period of 20 years. How much do you get in return? Around 6,50,000 lakhs including interest @ 6 per cent p.a. What good would that be after 20 years considering the rate at which prices are going up in this day and age?
Sanjay: Hmm, I see.
Rahul: What you need to understand here is that a term plan is a pure protection plan. This means that if an unforeseen incident were to occur, your family will be taken care of as the sum assured will be paid out to them. During those emotionally distressing times, you would at least have the peace of mind knowing that you provided financial security to your family while fulfilling all the dreams that you would have planned for them. Besides, term insurance premiums are very affordable and do not change for the entire term. Now, isn’t that a good enough reason?
Sanjay: I never looked at Term insurance from this angle. Thank you for opening my eyes, Rahul.
The convenience, financial security and peace of mind having a term insurance bestows upon you is simply unbeatable. Besides, term insurance also has the added advantage of being a tax-saving instrument. You really need to plan today as no one knows what tomorrow holds.
AN Mar 91/18