There has been almost no individual who has not counted “Life Insurance” amongst his or her investment. This notion cuts across all levels, age & gender. Fortunately, I now hear a small section of population saying that “Term Plans” make sense and they shun traditional Life Insurance products.

That’s absolute music to my ears!!

So why is Insurance an expense and not an investment? Let me start by asking why does one buy life cover? The answer is very obvious, to provide for my family in event I am not alive. It’s a fact, isn’t it?

Now, have you figured out what kind of a life cover is required to provide for your family?

Let’s take an example of “A” who is 35 years old, married, has 2 kids and dependent parents. Monthly living expenses excluding home EMI & car loan is close to Rupees Fifty thousand per month. Yearly expense is Rs.6 lacs and growing each year – children’s education, parents’ medical costs and inflation impact. Which means the requirement next year is Rs.6.5 lacs.

Assuming inflation at 7%, his spouse would require about Rs.1.5 crore just to cover her lifetime of living expenses. We still haven’t come to children’s education, marriage, parents medical costs, home loan, car loan, holidays’ for the family and any other commitments. If you add up, it should probably cost about Rs.2 crore plus.

Now, compare this requirement versus your current traditional insurance cover. Two things stand out:

  1. Low coverage with traditional plans – and they come at a significant cost.
  2. Costs are prohibitive for such large amounts of cover.

Traditional plans come at about 1/10th premium per year for coverage amount. Though you get your money if you survive, the returns that everyone focus on is miniscule (4%-6%). And this includes the annual bonus & loyalty bonus that Insurance agents stress so hard on in their sales pitch.

More importantly the coverage is a pittance compared to your families’ requirement.

Here is where “Term Plans” score over traditional plans. A 35-year-old healthy, non-smoker can get a cover for 1crore for as less as Rupees ten thousand a year.

Here is what one can do:

Assuming this individual was making annual payment of Rs. Fifty thousand for a 10-lac cover (20 years),

@6% return he will get Rs.18lacs on maturity.

Alternately, he must:

  1. Take a “Term Plan” of 2 crores which shall cost about Rupees Twenty Thousand –
  • Please note take a cover before you close any policies!!
  1. Make the traditional policy “paid up” if 3 years are completed. Your coverage reduces by proportionate amount, and you will receive your money with some returns at the end of the policy.
  2. Start a monthly SIP of Rs.2500/- (30000/12) for 20 years from the money you have saved by closing your term plan. This SIP at a conservative 12% return will build up to Rs.24 lacs in 20 years. Additionally, you have a cover of 2 crores for your family!!

There are two benefits of this approach:

  1. Adequate life cover in event of any eventuality
  2. Diverted money towards achieving your long-term goal.

I know some may ask, what about tax benefits, Term Plan gets you same tax benefits & invest in an ELSS mutual fund which will also give you tax benefits.

Hope this now clarifies why one should treat Life Insurance as an expense and not an investment or hope to get this money back…. Spend it… forget it!!