How many people in India know what insurance really means? Not many going by the various plans that have been sold over the years.
While different individuals plan their finances differently based on their needs and incomes, it is also true that all individuals need to have a term plan in their financial portfolio. Also other insurance plans can co-exist in your portfolio.
How is insurance defined in layman terms?
Insurance is protection against financial loss arising on the happening of an eventuality. In life insurance parlance, the event happens to be the death of an individual.
To begin with, there are two basic types of plans; endowment plans and term plans. All other plans are actually variations derived from these two.
In an endowment plan, the premium paid covers a savings element that is invested in different investment instruments to generate returns in the long-term.
A term plan, being a pure risk cover plan, only administration expenses and mortality charges are covered in the premium. There is no savings element in the premium being charged to the insured; as a result the insured does not receive anything should he survive the entire term.
So why are we advocating term plans?
The reasons are very clear. A term plan offers the insured a higher sum assured at a very low cost. And this is the fundamental principle of insurance. But in India, history suggests that insurance has always been sold, it has rarely been bought. Blame the unscrupulous insurance agents for this. To really understand this statement, one has to take a look at the agent's commission structure of various plans.
Premium paid on term plans is lower compared to the premiums on other plans. An illustration will make things simpler to understand. Suppose an individual aged 30, wants to buy a term plan for a sum assured of Rs 10,00,000 for a tenure of 30 years. The premium in this case works out to approximately Rs 3,500. The agent will get Rs 1,050 as commission in the first year (@ 30%). But if the same individual were to buy an endowment plan, other things remaining the same, the premium would amount to Rs 27,500. And the commission on the same would be Rs 11,000 (@ 40%).
Term Plan Vs Endowment Plan
| Premium (Rs) | Commission (Rs) | |
| Term Plan | 3,500 | 1,050 |
| Endowment Plan | 27,500 | 11,000 |
It can be seen from the structure that commissions offered to the agent on term plans are the lowest that they can get compared to any other plan. Another reason for term plans being a more prudent option than other plans is its suitability to all individuals irrespective of their age, sex, earning capacity and lifestyle, and risk-taking ability. This plan is a necessity for all concerned as it offers maximum (cover) at minimum (premium). Ideally, a term plan should be taken for the maximum possible tenure available from the insurance company.
In fact, many insurance companies have come out with variations of the term plan. Some offer a different term plan for non-tobacco users, some companies. offer a special rebate for female lives insured. The tenure too varies from insurer to insurer. The individual should look into all the term insurance options before picking an insurance policy.
Individuals should therefore consider first taking a term plan at an early age. Because, the earlier it is, the cheaper it gets. More importantly unlike other plans, it's never too late for term insurance.