Choosing the right type of life insurance can be tricky. Should you choose a term plan or a savings insurance plan? Here's a complete guide that will help you understand and differentiate between the two and choose the one that best suits you.
Define your financial goals
Your goals could range from saving money for life-events, such as saving up for a wedding or buying a car. Or they could be long-term goals like providing financial protection to your family after your death.
Both savings and term insurance plans cater to different financial objectives, and once you have decided on your goals it will become easier for you to choose a plan that suits your needs.
Guaranteed savings insurance plans
These have several features:
1. Core benefit: Savings plans are risk-free products with dual benefits. Not only do they give returns on your savings, but they can provide life cover to a customer which is paid to their beneficiaries in the event of their untimely demise.
2. Payout: Savings insurance plans offer a guaranteed lump sum amount, which is paid out after a predefined tenure, i.e. on maturity. If the insurance buyer dies before that tenure, their beneficiaries receive a payout which is usually a minimum of 10X or 11X of the annual premiums paid. Some plans also pay the benefits as regular income for a fixed number of years after maturity.
3. Maturity: The maturity tenure of a savings plan can range from five to 20 years and beyond. Anyone with medium to long-term savings goals can buy a savings plan and use it to fund milestones of their life, for instance, a child’s marriage, home renovation etc., or as a supplementary income to support future expenses.
Term insurance plan
1. Payout: The sole purpose of a term insurance plan is to provide financial protection to beneficiaries after the death of a family’s primary breadwinner. The payout or ‘life cover’, therefore, is much higher than savings insurance plans since it acts as an income replacement after the policyholder’s death.
2. Tenure and maturity: A term policy should ideally cover your earning years. It is best to buy the policy at an early age, so you can lock in low premiums for the rest of the tenure.
There are no maturity benefits in a term insurance policy. The sum assured can only be claimed by your nominee after you are gone. Some term plans have introduced a unique feature where you can get all your premiums back after a certain age. For instance, if you buy a plan before the age of 40, you can choose to get all your paid premiums back at age 55 under the ‘Special Exit Value’ feature.
3. Important benefits: In a term plan, your nominee can get a very high payout despite very low premiums. You can also add riders to your term plan, which can protect you from life risks like accidental death or critical illnesses and save tax on them as well.
Key takeaway: Term insurance is essential insurance for every household. While a savings insurance plan is a hybrid product which can maximise your savings AND offer you life cover. A term plan helps your family cope with any financial adversity that could arise from your death. Both these plans will give you tax benefits under Section 10 (10) D and 80C as per prevailing tax laws.
It is good to include both these products in your financial portfolio. Together, they will strengthen you financially and offer security to your family. So, plan wisely; combining these financial products will work wonders for you.
Jataveda Bhattacharya, Head - Product Design, Aegon life insurance
