Naval Goel
If you are wondering why term insurance is called a pure risk protection, the simplest answer would be this. The term insurance offers protection against untimely death. The insurance company has to pay only if the insured person dies within the term period, not otherwise. Premature death is a pure risk event. Do not worry if you did not understand what have been just mentioned, as we are going to discuss this matter in detail here.
A term insurance plan provides you monetary protection in case of premature death within the insurance term. If the policy holder dies within the term period, the nominee gets a fixed sum assured as previously decided. Another interesting fact of this type of insurance is that the term insurance has very affordable premium rates because the insurance company is supposed to pay the nominee only if the death occurs within the policy period, otherwise there is no money back. There is no investment component and hence the premium only covers mortality.
Pure risk is a type of risk which is most likely to result in a loss, such as death. A pure risk protection plan is supposed to offer you protection against any such event. Since a term insurance is only liable in case of a death, the premium rates are really low even for a very high cover amount. It is true that many deaths occur within the term, but the number of survivors is still higher, and the company does not pay any money in the survival cases.
So, basically with a term insurance plan, you either lose your life or your money. The pure risk protection itself is a risk as you can never be sure when you are going to die.
Benefits of Term Insurance
Term insurance plans are beneficial for the following reasons.
• It is a pure risk plan. That means the plan is made to cover only the risk situation, in this case, death. But there is no maturity benefit involved otherwise.
• The plans and premiums are very cost effective. With an annual premium of about Rs 2000-3000 you get a death cover of up to Rs 10 lakh for a certain term period.
• Since there is no savings element associated, the term plan is a very simple and easily manageable type of insurance.
• They are easy to get out of. If you change your mind and stop paying the premiums, your risk insurance plan automatically ends. You do not get your money back as there is no savings element here.
• The term plan is best fitted for those, who are the sole earner of the family and want to leave sufficient money for their dependents, in case of eventuality.
• It is the best way to protect your family and dependents from any loan, education loan, home loan or any other similar short-term liability in case of your death.
• They are very easy to understand, compare, and buy.
As you have probably understood by now, term insurance is not a plan that secures your future but one that secures the future of your dependents. If you are looking for the savings element, you can alternatively go for a traditional investment and life insurance plan.
Term Insurance Limitations
There are many cases when a term insurance is not the best choice for you. As you can probably guess, the premium rate of a term insurance plan increases with the age of the policyholder. Most people cannot afford to buy term insurance at higher ages. Even most insurance companies offer term insurance only up to a certain age limit, say 65 or 70 years. The risk after that is very high for the companies.
If you are planning to save money for a specific task such as your retirement, children’s education and marriage or something else, term insurance might not be the best option for you. You have to invest through stocks, bonds, mutual funds or other investment options. The portfolio needs to be complemented by a term life insurance plan. The beneficiary will get the cover amount if you die within the time period, before saving enough for the future financial goals. The aim of buying a term insurance is to secure the future of your dependents in case of your untimely death, not to save money for their future.
Term insurance is also not there to provide regular income or money for your family when you are alive. You cannot ask for a surrender value or a loan under the policy.
Term insurance is a good option if you are on a tight budget or if your income is low but you want to provide a large financial cover for your family in case of your death or if you are under a large loan and do not wish to burden your children with it.
(The writer is founder and CEO of policyX.com)
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