The primary purpose of life insurance is to provide money to the family if the main breadwinner dies. In insurance terminology this is called pure protection or pure insurance. Insurance can also be purchased as an investment, for savings or for tax reduction. However, those objectives are all less important than pure protection and many of these secondary objectives can also be met by other financial products.
Since term life is the purest form of life insurance and protection, it offers buyers the highest leverage in terms of coverage to premium. This is the only product where the sum insured can be 350 times the premium paid. Do keep in mind that in term life covers, the sum insured is paid to the nominees if the policyholder dies during the policy term. No benefits are paid if the the policyholder survives the policy term.
The above presentation depicts what financial impact an untimely death can have on the survivors and how term life insurance can help manage this risk efficiently. There is always a confusion among buyers on the purpose of life insurance. All too often, it appears that people tend to buy life insurance as a tax saving device or as an investment vehicle. We would like to emphasize that the primary purpose of life insurance is protection of a value that is meaningful to the survivors. Investment is a secondary issue. Further, the tax saving benefits accrue for pure protection insurance as much as it does for investment products. The first goal in our view is to get an adequate protection cover, at the minimum possible cost.
The key benefits of Term Life Insurance are:
1. Maximum cover at low cost – A 35 year old can buy a 50 Lakh cover for a premium as little as just 15,000 a year. Any other life insurance product for the same cover would cost at least 10 times more.
2. Premiums are tax exempt under Section 80C and death benefit is always tax exempt under Section 10(10D).
3. The buyer can exit the policy anytime without any charges by discontinuing future premiums. We do not advise this as premium rates increase with age. However, discontinuation is a possibility if newer, cheaper products are introduced.
Term life sales form a small proportion of overall life insurance sales, primarily because most agents and distributors do not focus on it. The premium rates for term are the lowest and, as a result, intermediaries are often more focused on larger value products that have a large investment component. Such investment-oriented insurance is good for the intermediaries, whereas pure insurance is the best bargain for the buyer.
The video illustrates the concept and value of Term Life insurance: