Hi Sanjib. Why is a term insurance considered better than insurance that comes with annuities and bonus?

Ans: Here are some factors to consider and popular term insurance options:

Factors to Consider:

Coverage Amount: Choose a coverage amount based on your financial needs and future obligations.
Policy Term: Align the policy term with your financial goals and retirement age.
Premium: Ensure the premium fits within your budget for the entire policy term.
Claim Settlement Ratio: Opt for insurers with a high claim settlement ratio for reliability.
Rider Options: Check for additional riders like accidental death benefit, critical illness, etc., to enhance coverage.

Ans: opting for a pure term life insurance policy is generally advisable over a return of premium (ROP) policy. ROP policies tend to have higher premiums, as they offer to return premiums at the end of the term if the policyholder survives. However, this feature often comes at the cost of higher premiums, making it less cost-effective in the long run.

With pure term insurance, you pay lower premiums for the same coverage amount, ensuring that your family receives a substantial sum assured in case of your unfortunate demise. It's a straightforward and transparent form of protection without any investment component or frills attached.

When selecting an insurance provider, prioritize companies with a strong track record of claim settlement and customer service. Look for insurers with high claim settlement ratios and positive reviews from policyholders.

Remember, the primary purpose of life insurance is to provide financial protection to your loved ones in your absence. By opting for a pure term policy, you ensure that your family receives the necessary financial support without any unnecessary frills or complexities.

Ans: Term life insurance is designed to provide financial protection for your loved ones in case of your untimely demise. Choosing between a policy with no returns and one with premium returns depends on your financial goals. A policy without returns typically offers higher coverage at lower premiums, focusing solely on protection. On the other hand, a policy with premium returns provides a safety net by returning premiums at maturity. For a 37-year-old with a 27 LPA CTC and a family dependent on you, a sum insured that covers at least 10-15 times your annual income would be ideal. When selecting an insurer, prioritize companies known for competitive premiums and efficient claims settlement.

Ans: Mixing insurance with investment may seem convenient, but it’s often not the best approach. It’s crucial to understand the distinction between these two financial needs: protection and growth.

Why You Shouldn't Mix Insurance with Investment
1. High Costs: Insurance-cum-investment policies, such as endowment plans or ULIPs, often come with higher premiums. A significant portion of these premiums goes towards administration charges, commissions, and mortality charges, leaving less for actual investment.

2. Low Returns: The investment component in these policies typically provides lower returns compared to other investment avenues. This is because the funds are often invested in conservative instruments with limited growth potential.

3. Complicated Structure: These policies can be complex, making it difficult to understand the real value of your investment. The returns are not always transparent, and the surrender value is often much lower if you decide to exit early.

The Better Approach: Keep Insurance and Investment Separate
**1. Term Insurance for Protection:

Affordable Coverage: A pure term insurance plan offers a high sum assured at a relatively low premium. This ensures your family is financially protected in case of an untimely event.
No Investment Element: Since there’s no investment component, the entire premium goes towards providing life cover, making it a cost-effective option.
**2. Invest Separately Based on Risk Appetite:

Risk-Averse Investors: If you are cautious and prefer guaranteed returns, investing in Public Provident Fund (PPF) is a safe and tax-efficient option. It offers a stable return with the benefit of EEE (Exempt-Exempt-Exempt) tax status.
Comfortable with Risk: For those comfortable with market risks, investing in mutual funds is a better option. Equity mutual funds, in particular, have the potential to generate higher returns over the long term, which can significantly grow your wealth.
Final Insights
Combining insurance with investment usually doesn’t serve either purpose effectively. Instead, opt for a pure term insurance plan for protection and invest separately based on your risk tolerance. This strategy ensures you get the best coverage for your family while maximizing your investment returns, whether through safe instruments like PPF or higher-risk options like mutual funds.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in