Term Insurance vs Endowment Insurance

What do you mean by Life Insurance?
The actual and correct meaning of the life insurance is to protect your dependent from uncertain event called “DEATH”. But Over a period of time, People like you and me have changed the meaning of the Insurance to Tax saving instrument or wealth generation product. Please let me explain that you have been misguided and this is a better way for understanding life insurance.
Is your sum assured amount justifying your dependent’s need?
I know you have already taken many insurance policies and happily paying premiums on time. But, the really important question is that the total sum assured (S.A.) amount is justified for Dependent's need? Just calculate the total premium and total S.A. for yourself. Do you really think your Dependent will survive whole life with S.A. amount you have?

Let’s take an example: If you have S.A. of Rs.10 Lac with one dependent. If something happens to you then the nominee will get Rs.10 Lac.If the nominee put this money in bank fixed deposit with annual interest of 8% .The nominee will get Rs.80,000 (10 * 8000) interest per year. Don’t you think it will be difficult to survive even if there is only one dependent?

How do we achieve financial security for dependent in your absence?
The obvious answer is by increasing sum assured amount to 10 Lacs, 20 Lac, 30 Lac or 50 Lac. This is will be individual’s call based on no(s) of dependent.

Should I take convention (endowment) insurance policy of Rs.10 Lac at the age of25 for one Dependent?
Just imagine the policy premium amount for 10 Lac for any convention policy? If we consider best selling LIC’s Jeevan Anand policy then your annual premium will be Rs. 52,577.EvenIf you are capable of paying annual premium Rs. 52,577 then also it‘s not worth paying for it.

Do we have any insurance product for higher S.A. with less premium?
The policy with higher S.A. and less premium are called TERM INSURANCE Policy

What is a term insurance policy?
Term insurance is the purest insurance product at the cheaper policy premium where the nominee gets the sum assured amount at the death during policy year and there are no benefits like bonus or loyalty additions at the survival of life assured at the maturity. The beauty of this product is the premium amount.

Annual Premium of Term Insurance at different age. 


Premium Per 10 Lac

Age

Maturity Years

20

25

20

2208

2366

25

2544

2861

30

3227

3821

35

4613

5534

40

6940

8306
 As per  LIC's Anmol Jeevan Plan
Is term insurance wastage of the money?
No, You are getting enough financial security for the dependent at very less premium.When you are doing an investment (Like MF or PPF), you have to think about the return of the investment at the maturity. But, When you are taking an Insurance policy, you have to think about the return (S.A,) of the policybeforethe maturity in case of uncertain event.

How can we understand any insurance product better?
You can derive almost any insurance product using term insurance and PPF(Public provident fund).

Let's Prove Jeevan Anand is less worth than Term insurance+PPF with simple maths.

Jeevan Anand :This plan is a combination of endowment assurance and whole life plans.it provides financial protestion against death throughout the lifetime of the the life assured with the provision of payment of a lump sum at the end of the maturity.

PPF : This is a post office saving scheme with the annual compound interest rate of 8%.

Current age: 25 Sum Assured (S.A.) = 10 Lac Maturity Year(S) =15


TERM INSURANCE and PPF

Year

Premium of Term Insurance

Sum Assured (A)

Opening Balance (B)

Deposit in PPF Account(C) 

Total Interest (D)

Payable at Death (A+B+C+D)

1

2,356

1,000,000

0

71,802

5,744

1,077,546

2

2,356

1,000,000

77,546

71,802

11,948

1,161,296

3

2,356

1,000,000

161,296

71,802

18,648

1,251,746

4

2,356

1,000,000

251,746

71,802

25,884

1,349,432

5

2,356

1,000,000

349,432

71,802

33,699

1,454,933

6

2,356

1,000,000

452,932

71,802

42,139

1,566,873

7

2,356

1,000,000

568,873

71,802

51,254

1,691,929

8

2,356

1,000,000

691,929

71,802

61,098

1,824,829

9

2,356

1,000,000

824,830

71,802

71,731

1,968,363

10

2,356

1,000,000

968,362

71,802

83,213

2,123,377

11

2,356

1,000,000

1,123,377

71,802

95,614

2,290,793

12

2,356

1,000,000

1,290,794

71,802

109,008

2,471,604

13

2,356

1,000,000

1,471,603

71,802

123,472

2,666,877

14

2,356

1,000,000

1,666,878

71,802

139,094

2,877,774

15

2,356

1,000,000

1,877,774

71,802

155,966

3,105,542

Total Premium and Deposit Paid = 1,112,370

Maturity/Survival at end of 15th Year = 2,105,542

Term Insurance Premium is considered of LIC's Anmol Jeevan-I for the age 25

You can not deposit more than Rs.70,000 in PPF account in one Financial year








LIC JEEVAN ANAND

Year

Premium

Sum Assured (A)

Cumulative Bonus (B)

Payable at Death/Maturity (A+B)

1

74,158

1,000,000

45,000

1,045,000

2

74,158

1,000,000

90,000

1,090,000

3

74,158

1,000,000

135,000

1,135,000

4

74,158

1,000,000

180,000

1,180,000

5

74,158

1,000,000

225,000

1,225,000

6

74,158

1,000,000

270,000

1,270,000

7

74,158

1,000,000

315,000

1,315,000

8

74,158

1,000,000

360,000

1,360,000

9

74,158

1,000,000

405,000

1,405,000

10

74,158

1,000,000

450,000

1,450,000

11

74,158

1,000,000

495,000

1,495,000

12

74,158

1,000,000

540,000

1,540,000

13

74,158

1,000,000

585,000

1,585,000

14

74,158

1,000,000

630,000

1,630,000

15

74,158

1,000,000

675,000

1,675,000

Total Premium Paid = 1,112,370

Maturity at end of 15th Year = 1,675,000

On Death, Nominee will get S.A. = 1,000,000
again

Bonus assumed at average of Rs 45 per thousand of Sum Assured. 





So, At the maturity, Jeevan Anand(1,675,000) is less worth than Term insurance+PPF(2,105,542).
I hope, by now you would have understood the concept and importance of term insurance. In simple words “when you think about life insurance then you should think only about Term Insurance”.

I am not suggesting you to have term insurance with PPF account instead of Jeevan Anand policy. But, I strongly recommend you to have term insurance policy for your dependent. You should always take insurance for others not for yourself.

Many insurance agents do not advise us to opt for term insurance because they are getting less commission from cheaper term insurance premium. One of my relative is selling LIC insurance product since 1980 in my town and He has never sold any single term insurance policy before I took it in year 2008. In fact, He was not aware that such policy exists in LIC.

So, start paying your term insurance premium from tomorrow else you can read detailed post about Term Insurance fundamentals.
If you are convinced about term insurance then please share it with your friends and family members else share your doubts with me.