LIC Jeevan Bima is like the Parle-G of life insurance branding, which is to say that the TV ad is etched in our memories. Our parents also chose to buy these policies, and government-backing made it a secure investment too. But did you know that most LIC insurance plans are endowment policies, i.e, are investment tools?
What’s an endowment policy?
An endowment policy is considered an investment tool (with death benefits) rather than a life insurance. You pay a certain amount of money as a periodic premium until maturity. The choices for maturity terms range between ten, fifteen or twenty years or up to a certain age limit. If you happen to die before the maturity of the policy your nominees (typically dependants) are paid the death benefit (the full sum of the maturity amount). And if you survive the maturity period you earn profits on the premium paid and sometimes a bonus. Some policies also pay out to the insured (you, in this case) if you are diagnosed with a critical illness.
The goal of endowment policies is to provide a life cover along with a lump sum as savings. There are also profit and without profit policies. Plans aimed at specific goals such as education of children, whole life protection and pension also provide choices to consumers
Then what’s the drawback?
When costs are rising and there are other investment modules available, endowment policies appear to provide only minimal coverage or profit. For us ambitious individuals, we would need much more than a few lakh rupees to leave behind for our families. If you believe your dependents (partner and kids or even parents) should maintain a similar lifestyle, a term insurance is better suited.
Term insurance plans are designed as a safety net for your dependents and hence is an insurance on our life. There is no savings component or maturity money involved. But here are three reasons why you should consider a term insurance plan:
- Considerable death benefit: Since there is no savings or payback at maturity, the amount your survivors will get is much higher than from an endowment policy. Heard of “1 cr ka term insurance lijiye” advertisement on TV these days? That’s the amount your family would receive; if you choose that coverage.
- Cheaper premiums: Yes, compared to endowment policies, your yearly premiums are lighter on the pocket. If you choose to buy the cover for a longer period (rather than renewing it each year), premiums by insurers are discounted as well.
- Longer coverage: While endowment policies have a cap on maturity, you can choose to be covered under term insurance plans for up to 99 years of age. There is also flexibility in reducing the coverage, as premiums can become higher as you age. And you can move your money to savings or market-linked investment tools.
What should you pick?
Ideally, we recommend a term plan, moving away from traditional mindsets on life insurance. Endowment policies guarantee a savings at the end of the term, but the wealth you create is eroded by inflation and isn’t as high when compared with market-linked investments. Again, the death benefit will be barely enough for your family.
If your goal is to save taxes, both endowment and term insurance plans allow for tax deductions under Section 80 C. You can compare insurance plans on various aggregator websites on the basis of coverage, additional benefits (accident, deaths, critical diseases), and claims settlement ratio. Few websites you can look at are Coverfox, Policybazaar, Bankbazaar, and ComparePolicy. Of course, price parameters based on your age and smoking habits will play a role. Often agents will call you to assist you in buying a suitable plan. But spend some time on research and this won’t be necessary.
As morbid as this may sound, you have to think of term insurance as a security for your dependents, rather than a wealth creation tool for you. Moving from the traditional mindset of “I am putting in money, what is in it for me” is key.
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