Is Life Insurance for Financial Security or Savings?
Life insurance is considered one of the most secure and safest ways to provide financial security to family against any type of financial emergencies. Since the coverage is enhanced, so is its premium. Term insurance plans and insurance for savings are two different products which caters to different life insurance needs of their customers.
Term insurance is a plan valid for a specific period and offers death benefit to the nominee in the event of the death of insured. The coverage is available for the limited term of premium payment years. This means that if the policyholder survives the insured period, the policy lapses as there is no maturity benefit.
On the other hand, insurance for savings provides death benefit along with income benefit (cash account that is exempted from any taxes). It has a cash value feature that acts as a tool for investment. Cash accumulated over time can be used or retained at the sole discretion of the policyholder. The cash can even be used for premium deduction or saved for retirement. The only concern for customers buying insurance for savings is the high premium.
Let us look at the other differentiating factors of the two types of insurance plans. The details are as follows:
Insurance for Protection
Insurance for Savings
- Fixed tenure
- Flexible tenure at times applicable till the insured reaches 100 years
- Provides death benefit in case of demise of the insured within the term period
- Provides both death and maturity benefit to the insured
Risk covered vs Savings
- Does not offer any survival benefits or maturity returns like of other life insurance plans
- Offers survival benefits or maturity returns along with death benefit in case of death
- Surrendering/opting out of a term insurance policy is much simpler than surrendering an insurance policy with savings element in it
- If the insured stops paying the premium, the benefits of the policy terminates and the policy lapses
- Plans are renewable and offer an option to convert the policy into an endowment plan for the same sum assured with an increase in the premium
- Maturity benefit is provided only if the insured completes the entire tenure of the policy or death benefit gets triggered in case of death
- If the insured surrenders or bring a close to the policy mid-term, he/she will not be able to recover the entire saving portion of the policy, as only the premium amount is paid back to the insured, that too, after the certain deductions, called surrender value<
- Affordable plans that provide higher coverage at a minimal cost (though the premium at the time of buying keeps on increasing with age)
- Beneficial for those individuals who want to cover their family's financial security post their lifetime
- High premium amount for coverage compared to term insurance
- Generally offer low returns, between 5-7% (which is further reduced in case the policyholder surrenders the policy)
- Costs related to administration, too, reduce the returns
- Eligible for tax benefits under section 80C of the Income Tax Act
- Eligible for tax benefits under section 80C of the Income Tax Act; yields tax-free income when the maturity claim is paid
Thus, the key criteria for choosing an insurance policy should be the life cover requirement that stems from the financial planning exercise. As per the current life stage and investable income, one can avail both types of insurance policies. As one plan provides the benefit of investment return and life protection, the other secures the financial future of the loved ones by paying a minimal premium.
So, if one plans to cover only death risk, gain tax benefit and cannot afford to pay high premiums, they should consider investing in term insurance. However, a life insurance policy with savings element should be the priority if one wants to create an investment corpus along with a life cover.