Advantages of Term Plan over Endowment Plan

Recently I bought a Term Plan from Kotak through their online process. The SA was 30 lakh and the yearly premium worked out to be a little over 4500/- for a period of 30 years. When I told my father about this term plan, the first question he asked me was ‘What’s the return benefit on maturity?’ and I had no reply.

Insurance v/s Investment
This is one of the biggest mistakes that we make. We look for maturity benefit while going for an insurance policy. We mix insurance with investment, whereas, we should be separating the two like husk from the grain. We need to understand that investment is a long term plan for multiplying our saved up money so we can sustain our lifestyle without making compromises.

And insurance is a risk mitigation plan, wherein, if the bread winner of the family meets with some unfateful incident then the amount can help the family memebers in his/her absence.

Old Thought v/s New Thought
Our parents and other elderly members from previous generation always push for some Endowment Plan which will benefit us on maturity. But that actually comes back to bite us. Let me try to explain this using an example below.

Endowment Plan v/s Term Plan
LIC has an Endowment Plan called Jeevan Anand. In this plan, for a SA [Sum Assured] of 5 lakh, the premium is 38,000/- per year for 15 years period for a person aged 30. The maturity benefit including bonus is about 7 lakh, if the insured person survives the period.

Now, instead of going for the above plan, lets see how best we can use that amount of 38,000/- and separate investment and insurance.

If we take any Term Plan for SA of 15 lakh [3 times the SA of Endowment Plan] for a term period of 15 years, the premium works out to be only 3,000/- per year . Lets put the remaining amount of 35,000 in a PPF account which is the safest debt instrument. If we continue to pay the said premium and deposit the said amount in PPF, at the end of 15 years when the insured person survives the period, they will have accumulated 10 lakh in the PPF account. Even if we deduct the amount of 45,000 that’s paid as premium of the Term Plan [3,000 x 15 = 45,000], the effective return is about 9.5 lakhs. This is still higher than the maturity benefit of the endowment plan. In case of death, the SA of 15 lakh is given to the nominee, and this is twice the SA of the endowment plan.

Disadvantages of Endowment Plan:
a. very high premium for very low SA
b. very low gains on maturity
c. mis-selling of a bad policy which is neither good as insurance nor good as investment

Advantages of Term Plan:
a. low premium for very high SA
b. the extra money can be invested wisely in some good debt instrument like PPF or can be put in a good index fund
c. the extra money can be used to pay EMIs or can be saved for any other emergencies

Now that term plans can be done online, don’t break sweat over it. We have many options like Kotak’s E-Preferred Term, HDFC’s Click2Protect and ICICI’s iCare.

Some key things to note:
a. go for a high SA of 25-30 lakh, because the premium will not be more than 5-6 thousand. That’s a small amount to pay!
b. make all declarations truthfully, including details of previous insurance policies from other insurers
c. take a medical test if need be, do not hesitate. Its better they take a medical test, so that they don’t cause any problems later in case policy has health related riders for critical illness etc
d. pay your premiums on time, do not default on that
e. advise all near and dear ones to buy a term plan

I just have to explain the above to my father now. But I am sure, he would still not be convinced. Anyways, buy a term plan today and put your mind at ease.

This post was also published on Yahoo Network

 

LIC Jeevan Vriddhi

I was just looking out for some insurance plans, Term Policies to be more specific. And then, I came across this new plan from LIC called Jeevan Vriddhi.

Term plans usually don’t come with return benefits, but this plan does. And that’s what struck me about it.

Salient features of this policy are:
a. its a single premium policy wherein the minimum amount is Rs.30,000.00 and no limit on maximum amount
b. sum assured is 5 times the premium
c. the term is fixed at 10 years
d. age of entry is between 8 & 50
e. policy can be surrendered after 1 year

Other benefits:
a. minimum return is almost 90% of the premium amount, if surrendered after a year
b. between premium amount of Rs.50,000.00 and Rs.99,000.00; there is an increase in guaranteed sum assured by 1.25%
c. beyond premium amount of Rs.1,00,000.00; there is an increase in guaranteed sum assured by 3%
d. policy ie eligible for section 80c exemptions in IT
e. you can avail loans at 10.25% against this policy

There are very few policies that give return benefit and sum assured. Its specially beneficial for someone in their late 40’s who want to take an insurance policy with minimum fuss and maximum gains. Even for people in their 30’s, this is a good enough plan where return of interest is about 7-8%. We can get the benefit of protected investment as well as life insurance. And since its single premium, there is no need to bother about tracking the due dates!

Update 1 on 22-Mar: I just called my insurance agent and have created a proposal for a single premium of Rs.60,000/-. So, the SA is about Rs.3,00,000/-. That’s when it struck me that the premium was much lesser than what I was paying for a Jeevan Saral plan [yearly premium of more than Rs.6,000/- for 10 years and SA of Rs.1,50,000.00], and the SA was twice that of Jeevan Saral.