Why buying a term plan is smarter than conventional life insurance products
Every generation is hugely influenced by its predecessor. And it is no different in terms of personal finance. One such hangover that we inherited from our last two generations is ’investing’ in life insurance products that come with maturity benefit.
Contrary to the popular belief that they solve both purposes, such policies are neither good insurances nor good investment products.
"Insurance and investments are two separate things solving two different purposes. The former covers financial risks, while the latter helps you create wealth. And, mixing the two is a major mistake," said Renu Maheswari, certified financial planner and Sebi registered investment adviser, CEO and principal advisor, Finscholarz Wealth Managers.
Let’s understand this theory with some relevant examples.
The coverage amount for life insurance policies with maturity benefits, like moneyback policies, endowment policies, retirement policies etc., is 10 times its premium amount. That is, if you have a ₹20 lakh life insurance cover (with maturity benefit), your yearly premium would be ₹20,000. On the investment side, such products provide 3% to 4% interest rate, which is more or less the same as savings bank account.
Now, there is a smarter move that you can make with the same amount of money. And to make it more relatable, let’s consider a few essential factors. Say, you are a 30-year-old individual; your current life insurance requirement is ₹50 lakh; you plan to spend exactly ₹50,000 for your investment and insurance.
On average, the yearly premium amount for a ₹50 lakh term plan cover would be ₹6,000. Now, the rest, i.e. ₹44,000, you invest in a product that provides you a 7% interest rate. At the end of 20 years, you will get nearly ₹20 lakh for the same investment.
"You can invest as per you financial goal, lifestyle and income considered," adds Maheswari.
So if you compare among the two scenarios, for buying a term plan along with having a concrete investment plan your net gain is higher than going for a life insurance product with a maturity benefit.
Source : Live Mint