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: 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

Ans: Difference Between Term and Permanent Life Insurance
Life insurance is important for financial security. It helps protect loved ones in case of an untimely demise. There are two main types: Term Life Insurance and Permanent Life Insurance.

Both serve different purposes. Let’s analyse their features, benefits, and suitability.

Definition and Purpose
Term Life Insurance offers coverage for a fixed period. If the policyholder passes away within this period, the nominee gets the sum assured.
Permanent Life Insurance provides coverage for the entire lifetime. It also has an investment or savings component.
Cost and Affordability
Term insurance is much cheaper. It provides only pure life cover.
Permanent insurance is costly. It includes life cover and an investment component.
For those looking for maximum coverage at a lower cost, term insurance is better.

Premium Structure
Term insurance has fixed and affordable premiums. Premiums remain constant throughout the policy term.
Permanent insurance has high premiums. A part of it goes towards building cash value.
If the goal is cost efficiency, term insurance is the preferred choice.

Maturity Benefits
Term insurance has no maturity benefit. If the insured survives the term, there is no payout.
Permanent insurance builds cash value. This can be withdrawn or borrowed against.
Those looking for pure protection should opt for term insurance.

Investment Component
Term insurance does not have an investment feature. It is purely for protection.
Permanent insurance acts like an investment. It grows in value over time.
However, returns on permanent insurance are often lower than other investments.

Flexibility in Coverage
Term insurance allows coverage for a specific term, such as 10, 20, or 30 years.
Permanent insurance covers the insured for life.
For those wanting lifelong coverage, permanent insurance is an option.

Liquidity and Borrowing Facility
Term insurance has no cash value. It cannot be used for loans.
Permanent insurance builds cash value. This can be borrowed against if needed.
However, borrowing reduces the final payout to nominees.

Returns on Investment
Term insurance provides no returns. It only offers financial security.
Permanent insurance gives returns, but they are lower than mutual funds.
Instead of permanent insurance, investing in mutual funds can provide better growth.

Tax Benefits
Term insurance premiums qualify for tax deductions under Section 80C.
Permanent insurance also qualifies for 80C deductions. Additionally, the maturity amount is tax-free under Section 10(10D).
Both options offer tax benefits. However, term insurance is more cost-effective.

Who Should Choose Term Insurance?
Individuals looking for high coverage at a low premium.
Young professionals with dependents.
Those who prefer separate investment and insurance planning.
For most people, term insurance is the best choice.

Who Should Choose Permanent Insurance?
Individuals looking for lifelong coverage.
Those who need a cash-value component.
People who want a forced savings mechanism.
However, better investment options exist outside of permanent insurance.

Common Myths About Life Insurance
"Term insurance is a waste of money."
Reality: It provides financial security at an affordable cost.
"Permanent insurance gives better returns."
Reality: Mutual funds and other investments usually offer higher returns.
"Investing in insurance is smart."
Reality: Insurance should be for protection, not wealth creation.
Final Insights
Term insurance is affordable and effective for protection.
Permanent insurance is expensive and offers lower returns.
For financial growth, separate investment in mutual funds is better.
It is best to consult a Certified Financial Planner for personalised advice.
Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment