Why term insurance trumps traditional life insurance

Insurance was envisaged as a risk protection tool. A product that could mitigate the negative impact of adverse events on your financial well-being. Thus, it has become increasingly important to have insurance coverage to proactively deal with the uncertainties of life. From that perspective, a life insurance policy should be purchased by every individual as it provides holistic protection to your family in the event of death. Due to immense product side innovation stemming from a desire to serve the nuanced needs of customers, there are multiple types of life insurance policies that are currently available in the market. Two of the most popular ones are the term insurance and the traditional life insurance plan. While each serves a specific purpose, which one is better for you?

Term insurance – Ticking all boxes

A term insurance policy provides a death benefit only if the demise of the insured takes place within the term period. On the other hand, a traditional life insurance policy offers both death and maturity benefit to the insured. The general thumb rule is that you should have a minimum life insurance coverage of 10 times your annual income or coverage sufficient to meet future living expenses after accounting for inflation. Due to the maturity benefit offering, many people eschew term insurance in favour of traditional life insurance.

The primary role of a life insurance plan is to provide your family financial security in case of your untimely demise. Ideally, you would want to purchase the highest possible coverage to protect your family. However, your ability to pay premiums can influence the amount of coverage that you purchase. In the case of a traditional life insurance policy, the coverage offered is directly proportional to the premium paid, i.e., higher the premium amount, higher will be the coverage offered. However, if you are not in a position to pay a higher premium then you will have to settle for lower, and often suboptimal, coverage. With a term insurance plan, you don’t need to compromise on the coverage you purchase.

Benefits of term insurance plan

Term plans offer higher coverage for more affordable premiums: This means that even with a low premium commitment you can give your family the highest possible coverage with a term insurance plan. While other life insurance plans might offer maturity benefits, guaranteed returns, and periodic moneybacks, a term insurance plan gives you the option of getting a sufficiently large sum assured at a low cost. Thus, you no longer need to compromise on your family’s financial security.

Premiums are locked in for the duration of the plan: The premium that is decided at the time you purchase the plan stays the same throughout the duration of the plan. This allows you to efficiently plan your future savings. More importantly, if you purchase a term insurance plan early on, i.e., when you are younger then then you will end up paying lower premiums for the entire duration of the plan.

Simple to understand: Term life insurance plans offer a pure life cover and are simple to understand. All you need to do is ensure that the premium is paid on time.

Opportunity to amplify investments: Further, the money that you save on premiums can be reinvested into other income generating investment instruments. This way, you can get the coverage you desire and potentially grow your wealth.

In a landscape that is flooded with multiple products, it is important for you to understand the relative advantages and disadvantages for each product and then choose the solutions that best meet your specific requirements. A term insurance plan is like a universal umbrella that can holistically meet your insurance imperatives.

(The writer is co-founder, Turtlemint. Views expressed are personal)