Guide to investing in term and refund life insurance plans – Forbes Advisor INDIA
The financial progress a family has made over the years can easily be wiped out in the event of an unfortunate event like the death of the sole breadwinner. To cope with such problems, there are life insurance plans that can ensure the financial well-being of your loved ones. Life insurance acts as an irreplaceable tool that offers comprehensive financial protection against uncertainties.
Life insurance is available in various categories and in addition to providing financial protection, it can even be purchased to cover various financial expenses such as child rearing, marriage as well as wealth building for family planning purposes. retirement. Among the different types of life insurance plans, the two most common categories include term insurance products and reimbursement life insurance plans. The two have different goals to solve and it is advisable to have a combination of the two for a strong financial portfolio. Here’s what you need to know about them before you opt for one.
Term life insurance plans
Regular term plans
A term insurance plan is the most basic type of life insurance policy that provides complete financial security for your dependents in the event of death during the term of the policy.
- A pure term insurance plan offers huge coverage for a very low premium amount, for example: 1 crore life coverage is available for INR 500 per month. This is a plan that allows the policyholder’s agent (s) to receive the main benefit of the plan, i.e. the sum insured or life coverage in the event of the death of the policyholder. policyholder during the term of the contract.
- There is no product at maturity because the premium paid itself is very small compared to the amount of coverage provided.
- Under a term life insurance plan, the policyholder has the right to choose the amount of coverage as well as the length of the policy according to their personal needs and requirements.
- Ideally, it is suggested that you take out a term insurance plan until your retirement age or until the age at which you have financial debts.
- As for the amount of coverage we are looking for when purchasing a term plan, according to the Human Life Value concept, life coverage should ideally be 15 to 25 times your annual income depending on your age. current.
For example, if you are a 30 year old with a spouse and child and earn 10 lakh INR per year. You need to buy a plan with a sum insured of at least 2 crores INR and a policy term between 60 and 65 years. Some might think that INR 2 crore is a huge amount of coverage, but, assuming your spouse uses INR 2 crore wisely by entering a fixed deposit (FD), a long-term after-tax annual payment from an FD of INR 2 crore may be less than INR 8 lakh per year which would only cover the expenses with inflation.
- While deciding on the sum insured, other factors should also be kept in mind, such as outstanding debts like a home or car loan, one-off expenses like childrearing and marriage, and planning. retirement for oneself and one’s spouse. From a human life value perspective, the life coverage one should have is broadly defined as 25 times your annual income up to age 35, 20 times your annual income between age 36 and 40, 15 times your annual income. annual income between 41 and 41 years old. 45 years old and so on.
- When you buy a term plan, you can also choose the payment option as per your requirement. Choosing the payment option is one of the most essential steps as it is imperative to use the money wisely to be able to meet all future expenses.
- Most insurers offer two basic payment options to policyholders when purchasing a term plan: the lump sum payment option and the installment payment option.
Under the lump sum payment option, the entire amount of coverage or sum insured is paid to the named persons or dependents as a lump sum at one time. For example, suppose a client purchases a term plan with a sum of INR 1 crore insured and chooses a lump sum as the payment option. Henceforth, in the event of the death of the policyholder during the term of the policy, the dependents will receive an insured sum of INR 1 crore as a lump sum.
This money can be used to pay off unpaid debts, one-time expenses, and daily expenses, and the remaining amount can be better used to earn returns. On the other hand, customers also have the option of selecting an installment payment when purchasing a term plan.
Under the installment payment option, the sum insured or the amount of coverage is paid in several parts. This means that part of the sum insured will be paid as a lump sum – mainly 35% to 50% – while the remaining part is paid in monthly installments for a predefined period.
In the installment payment option, other variations are also available, which customers can choose according to their individual requirements and needs. When choosing the option of paying for the financial security of your family, always keep in mind their financial understanding and choose an option.
- An important advantage of investing in temporary plans is that the premiums paid over the life of the policy are exempt from tax under section 80C of the Income Tax Act. Likewise, the sum insured received by dependents as payment is also exempt from tax under Section 10 (10D) of the Income Tax Act.
Besides the regular term plans, clients can also benefit from two other variations of term plans available in the market.
Term Insurance with Return of Premium (TROP)
Another popular type of term insurance plan is Return of Premium Insurance (ROP) under which all of the client’s premiums are repaid at the end of the term of the policy.
- People who care about ROI, TROP plans are the most suitable choice for them. Indeed, all premiums paid and received at maturity are tax-free.
- However, it should be noted that TROP plans are relatively expensive compared to regular plans. For a 32 year old investing in a TROP plan with INR 1 crore insured and coverage up to age 60, the monthly premium would be INR 2,000.
Whole life insurance plans
A whole life insurance policy is a form of permanent life insurance plan that covers the client until they are alive.
- The maximum term for which whole life plans are available is 100 years. If a person dies during the term of the policy, payment goes to dependents.
- The plan is mainly suitable for people who have dependent children or for those who wish to bequeath an estate to their legal heirs.
- A whole life plan for a 32 year old for an insured sum of INR crore will cost around between 1500 INR and 1800 INR per month.
Life insurance plans with reimbursement
Reimbursement life insurance plans provide insurance coverage as well as maintaining cash flow through regular income for risk averse individuals. This is a variation of endowment plans which also guarantees the return on the investment you have made.
- Payback life insurance plans promise fixed returns after a predefined policy term. These plans are typically unrelated, non-participating life insurance products offered by life insurers that promise assured returns after a proposed term.
- Usually, endowment plans have a policy lifespan ranging from 10 to 30 years. At the expiration of the plan, customers have the option of choosing between a fixed lump sum or regular income at fixed intervals – depending on the structure of the plan – as a payment option. The amount of the payout depends entirely on the plan you choose, the length of the policy, and the premiums you pay.
For example, according to Mr. Singh, a 40-year-old Bangalore resident who earns INR 20 lakh per year invests INR 5 lakh in a traditional non-participating investment product. Now, if he chooses a premium payment term of 10 years and a policy term of 20 years, from the 11e year, he will start receiving a monthly payment of around 85,000 INR for the next 10 years. Over a period of 10 years, he will receive a total payment of approximately INR 1.02 crore.
Fixed returns for the maximum period
The returns offered on reimbursement life insurance plans are generally fixed and clients do not have to worry about calculating the returns, as the approximate amount at maturity is already indicated to policyholders when purchasing the. product.
- The interest rate of most endowment plans generally ranges between 5.50% and 6%.
- The rates of return offered on refund life insurance plans are currently much better than the interest offered on bank term deposits.
- Last year, during the month of April, the RBI cut the repo rate to an all-time low of 75 basis points at 4.40%.
- In fact, this is happening for the first time in 21 years that traditional life insurance plans offer better returns than term deposits – the most preferred investment vehicle of almost all Indian families. With a steady decline in the bank interest rate on FD, from 8.5% in 2014 to 5.4% in 2020, the market for traditional investment plans has started to regain a steady pace.
Another unique selling point of refund life insurance plans is that in addition to offering good returns, they also offer policyholders the benefit of life insurance which is typically 10 times the annual premium paid. or 120 times the monthly premium.
- For a person investing 10 lakh INR per year in a reimbursement life insurance plan, the life coverage payable to legal dependents in the event of the death of the policyholder will be 1 crore INR.
- Traditional life insurance plans are primarily intended for risk-averse clients who prefer guaranteed returns over a long period rather than higher returns over limited years.
Traditional life insurance plans or blended policies operate under the triple taxation formula whereby clients can enjoy tax benefits on the money invested, interest on the money invested as well as the amount left over. ‘deadline.
- There is no tax on premiums invested, accumulation – the investment that grows over time and the benefit at maturity.
- For example, if you choose to invest 5 lakh INR per year in a guaranteed return plan – a reimbursement life insurance policy – for a period of 10 years. In 10 years, you will be able to save 4.68 lakh INR on the premiums paid under section 80C of the Income Tax Act.
- The due date you will receive after the insurance period is over will also be tax free. There will be no tax on the amount at maturity.
- However, if the same amount was invested in a fixed bank deposit, the customer would have to pay a fee of INR 5.13 lakh on the maturity amount – INR 1.02 crore. In total, by investing 5 lakh INR in a traditional life insurance plan over a period of 10 years, clients can save a total of 9.8 lakh INR as tax benefits.