Why should we purchase insurance? Answers may vary depending on the needs of each individual. It could be used to provide financial protection. Some people use it as a way to save taxes. There are many insurance plans on the market that cater to different needs. Therefore, one should not buy insurance just because they need it but also have a clear purpose and reason for doing so. It is clear that many insurance plans are solely designed to provide tax benefits. Sometimes, the “insurance” element can be severely undermined.
Insurance is designed to provide financial protection for dependents in the event of the death or disability of the breadwinner. Insurance should be considered first for individual needs, and then for tax benefits.
Let’s look at the traditional insurance plans to see which one is better.
Term insurance:
The most basic plan on the market is the Term Insurance Policy. It is the oldest type available and most young clients choose to start with it. As it is easy to access with the lowest premium, it is the best choice for first-time clients.
Unlike other policies that provide survival benefits, a term insurance policy offers only death risk coverage. Term insurance policies have a time limit and no claims are paid after the policy term expires. These policies have a limited time base which means that the family receives the claim in the event of death during the policy term. If the policyholder dies before the end of the policy term, no payment will be made. The policyholder can choose to renew or cancel the policy at any time after expiration. The policyholder will not be reimbursed for any premium that was paid during the policy’s life.
The premium component of term insurance is lower in the initial period, or if it is taken young, but it quickly increases as the insured ages. The mortality rate is higher with age. This explains why the premium component increases so quickly.
Benefits:
Insurance is a pure-death policy that provides financial support to the family in the event of death. It also helps to pay any outstanding debts.
Endowment Program:
The Endowment plan combines both investment and insurance. The policy covers the risk for a specified period. In the event that the policyholder dies during the period, the sum assured determined at the beginning of the policy is paid to the policyholder as a survival benefit. These premiums are significantly higher than those for term plans.
The policyholder’s death during the term is considered the death benefit. In this case, the nominee receives the assured sum and the accumulated bonuses. If the policyholder is still alive at the end of the term, the sum assured along with the accumulated bonuses will be paid as the survival benefit.
This plan guarantees returns. However, there are some terms and conditions.
1) A policyholder who surrenders his policy within the first three policy years is not eligible for any surrender value.
2) Policy surrendered after three years is subject to a surrender value less than the premium amount for the previous 3 years.
3) Bonuses cannot be guaranteed and are generally paid only if the company reports profits.
Let’s now compare both plans.
Insurance theory is based on the principle that insurance and investment should be kept apart. This theory explains why term insurance is better than investment because there is no investment component and no return on maturity. The premium amount for term plans is lower because they charge premium only for protection, not investment. Endowment premiums have both investment and protection. Endowment premiums are higher because premiums are invested in more instruments after taking out insurance, mortality and other fees and some return on maturity. Endowment returns are less than the premium terms chosen.
