Protect first, save and invest next: Why you need term insurance

Monthly investments of Rs 30,000 in bank deposits, pension plan and mutual funds were part of Prabhat Reddy's grand financial plan. But the 37-year-old software engineer was never told about the one big gaping hole in his plan - lack of term insurance.

Like many others, Prabhat assumed if he saved and invested for the next 20 years, his financial investments would fetch him Rs 3 crore -4 crore and secure his family. This would work, if he actually did that for 20 long years. However, Prabhat took his life guaranteed, a mistake that cost his family dear when he met with a fatal car accident 15 months later.

Without Prabhat's salary and his savings, virtually nothing was saved and invested for his family’s needs. Thousands like Prabhat make this common mistake of side-stepping term insurance.

Cover more important than return

Understanding risks are an important part Don't ignore! It is very important to insure income that your earn.htmlof any financial plan. Once you understand a risk, the smart thing to do is get a cover to protect against the risk. When we see cloudy skies, we take the umbrella when going outside. When we see commotion on the road, we take a different route.

Much like the umbrella, term insurance provides financial protection that automatically works in the event you lose your life. It is the only product that pays you a big some of money for small payments known as premium. Yet, many educated and informed people make the fundamental mistake of measuring term insurance as a product that will give returns. In term insurance, getting the adequate cover is more important than return.

Returns work for an investment product like bank deposit, stocks, mutual fund or pension plans. You put money in the investment, and it grows either by a fixed rate or a variable rate. Much like a helmet for a two-wheeler driver or a seat belt in a car, term insurance is the only thing that protects your financial goals in form of a lump sum payment if you die early. You may travel thousand times without a mishap, but a helmet or a seatbelt is for that precise 109th time or 9678th time when an accident happens. A term insurance policy operates on the same principle.

We don't know when death will strike, but when it does, be sure that a term insurance policy will work to keep your financial plan intact. So, buy term insurance even as you regularly invest to get returns. The benefits are significant, guaranteed and come at an affordable price.

Be smart, change mentality

It is our wrong mentality that acts like a big road-block when it comes to buying pure risk-protection products like a term insurance policy. Not every penny has an immediate gain. Sometimes, money spent many years ago can come back and give you tremendous value.

We fail to realise that buying a Rs 1 crore annual term cover for Rs 10,000 is in fact a stupendous deal. If you buy before Goods and Service Tax (GST) comes into effect on July 1, you will get a cheaper policy because the new tax regime will make term covers costlier by at least 3 percent. Buying term insurance policy online is as convenient as purchasing mutual funds online. Just a few clicks, submission of scanned documents and buying a term policy can be a breeze for a young & healthy working professional.

So, beware of the wrong mentality of ‘wanting return’ in term insurance. This will force you down the slippery road, and you will end up with no cover. The moment some find out that the survival benefits of a term insurance policy are zero (if you don’t die within the policy period, no payments are made), they foolishly start questioning the utility of the product.

Bank deposits, mutual funds and pension plans give returns on any investment. But none of them pay you the big advertised amount if you don't invest throughout the investment tenure. The full benefits of term insurance, on the other hand, are triggered the moment the life insured meets with death.

For instance, to be able to get Rs 1 crore in 20 years, you need to save and invest Rs 10,000 every month in products that give you 12 percent return every year. This means you must invest Rs 24 lakh in those 240 months. To invest Rs 24 lakh over two decades, you need to be alive. What if you die prematurely? Nobody will tell you that if you manage to save for just one year, you will get just 1 percent of the Rs 1 crore! See the table below to understand the true implications, and the benefit of adding term insurance to investments.

Term insurance covers can also save tax, just like you get sops via investments in tax-saving MF schemes. In fact, a term insurance cover can be a useful tax planning tool, because the policyholder is eligible for tax benefits. In short, the payments you make towards your insurance do not just cover the risk of death, but also allow you to save money from income tax.

Any policyholder of a term insurance is entitled to get tax benefits as per the Income Tax Act 1961. Normally, all term insurance policies offer customers tax deductions under Section 80C of the Income Tax Act, 1961, along with additional deductions up to an amount of Rs 1.5 lakh. Death benefits received by the policyholder’s nominee are also tax-free as per laws.

Calculate your premium online.

Additionally, some special term insurance plans on detection of a wide range of critical illnesses, cover as much as 34 critical illnesses, are also eligible for tax deduction under Section 80D.