Getting insurance is the biggest decision you can make to keep your family safe. Often people get confused between term insurance and life insurance. Actually, life insurance is a big insurance and term insurance is a part of it. Life insurance is an agreement in which the company promises to pay money to your family in case of your death. Term insurance only provides protection whereas other life insurance plans help in saving money along with protection.
The job of term insurance is only to provide protection. In this you take insurance for a fixed time. If you die in the meantime, your family gets the entire insurance amount at once. If you survive until the policy expires, you do not get any money back. This plan provides huge insurance cover for less money. There is no investment involved in this, that is why it is very cheap. The government also gives tax exemption in this. On paying the premium, one gets the benefit of Section 80C of Income Tax and Section 10(10D) on the money received. This plan is useful only at the time of death or any serious illness. It is best for those who want to provide cover worth crores to their family at very low cost.
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Other life insurance plans
There are many types of plans in life insurance such as endowment, money-back, ULIP and whole-life policy. The specialty of these plans is that if you survive for the stipulated time, you get some money back on completion of the policy. Along with security, it also has the option of saving money. It consists of important parts like policy taker, nominee, sum assured, premium, maturity and the amount received on leaving the policy. Since the company invests your money in it, their premium is much higher than term insurance. In these plans, you can make a fixed savings which can be useful together in future.
real math of investment
There is a huge difference between the two in terms of premium. For a 30 year old person, a simple term plan with a cover of Rs 1 crore is very affordable. At the same time, if you take a term plan with ‘Return of Premium’, then its premium can be up to 125 percent costlier than the ordinary plan. The premium for endowment and ULIP plans is even higher as it combines both insurance and investment costs. Experts’ clear advice is to never mix insurance and investment. If you ensure security by taking cheap term insurance and invest the remaining money separately in mutual funds, then you will get huge benefits in future. Keeping investments and insurance separate helps your money grow better and keeps your insurance costs down.
How to choose the right insurance cover?
There is no single rule to choose the right insurance cover, it depends on your income and expenses. A simple method is that you must take a cover of 20 to 30 times your annual income. While deciding the insurance amount, also keep future inflation in mind. If your expenditure is high today, it will increase further in future due to inflation, hence it is wise to buy a bigger cover today itself.
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If you have family responsibilities and have taken a loan, then give first priority to term insurance. Choose savings plans only when you do not want to take market risk at all or want to save money for a specific goal. The real function of insurance is not to earn money, but to provide financial support to your family in difficult times.
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