Life Insurance: TERM INSURANCE or WHOLE LIFE INSURANCE. Which one to buy?



There is a lot of confusion when it comes to insurance. Some people think that insurance is all about LIC in India.

This is similar to Maggie, which is a noodle but we don’t say that we want noodles. We say that we want Maggie. That’s a result of great marketing.

So, let’s try to clear the confusion and bust some myths about “INSURANCE”, specifically “LIFE INSURANCE”. But you have to remember one simple thing, “INSURANCE IS NOT AN INVESTMENT”.

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First of all, Insurance is broadly divided into the following categories:

  1. Life Insurance
  2. Health Insurance
  3. Auto Insurance
  4. Property Insurance
  5. Business Insurance, and
  6. Travel Insurance

In this article, we will discuss about life insurance, different types of life insurance, which life insurance is good for you and some common marketing techniques used by the corporates.

LIFE INSURANCE

Let’s say you have a family of 4, with a wife and 2 children. You have a home loan of 40 lakhs and your wife is a homemaker. It means you are the only bread earner in the family. Lets assume your kids are 5 and 7 years old. You have a total investment of 10 lakhs in FD (Fixed Deposit), mutual funds, etc.

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Unfortunately, if something happens to you then –

  • Who will provide financial security to your family? Will 10 lakhs be enough for their whole life?
  • Who will pay the home loan and EMI (Equated monthly installments)?
  • Who will provide the education to your children?
  • Who will feed your family?

That’s exactly the reason why we need life insurance. To make sure that tomorrow if something happens to us, our dependents do not have to worry about money.

However, alas, Insurance has become a business where the companies are fooling the folks just for the sake of profit. Today, most of the people in India as well as in other South Asian countries are trapped in such bad insurance products.

Now, Life Insurance is mainly split up in two categories:

  1. Term Insurance, and
  2. Whole life Insurance.
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What is the difference between term insurance and whole life insurance?

The only difference between term insurance & whole life insurance is that one is good and the other ranges from bad to ugly.

Let’s see this through the definitions first so that you get it in simple terms.

1. Term Insurance

It’s a fixed term contract between you & the company. So, lets assume you enter into the policy at 30 years (mostly flat per year).

If something unfortunate happens to you, your family gets the “sum assured” amount immediately on which they can sustain till the time the children become independent. Typical sum assured should be between 10 to 14 times your annual income. In mature markets like U.S, this multiple can be as high as 20 to 25% at very reasonable cost.

So, it’s simple. You pay for the risk of eventuality & know what your risk cover amount is. If you survive till 60, then it’s good for you, the contract ends. The policy gives you the peace of mind while you are earning without spending too much out of your savings (for premiums).

That’s all you need for your dependents in your earning years, Right? This is the GOOD PRODUCT.

Now, let’s move to the whole life insurance which is also known as “Permanent life Insurance”.

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2. Whole life insurance

This a type of insurance which has various forms like variable, universal and variable universal. It also takes the form of endowment plan, money back insurance, traditional plan, etc.

These plans are nothing but savings plans mixed with insurance, complexity, high costs and commissions that are peddled through agents with aggressive selling and poor transparency.

Notice the attractive use of catch phrases like “permanent”, “whole life” & “money back” V/S the very non-glamorous “term insurance”.

Obviously, who will buy the moment you show the product all open & make it simple to understand?

But here comes the corporates and agents. They will come up with tempting phrases, which we will talk about later in this article, and various product names like Jeevan Anand, Jeevan Rakshak, Money Back etc. But either they are endowment plan or ULIP’s ( Unit linked Insurance Plan ). But all products are bad except term plans.

Before you proceed further, please read this article on financial tips: A Comprehensive Guide of Financial Tips.

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Why “Whole Life Insurance” is bad?

The reason is the “Annual Premium”. Companies are not doing any charity by giving multiple benefits. They compensate for this by charging very high premiums.

The premiums are so high that if you try to calculate the annual return (which very few people know how to do it), you will realize that the returns are even lower than FD. The reason is due to multiple levels of commissions including the insurance agent’s commission and company’s own commission. No wonder why LIC is such a big company today.

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Some people thinks that ULIP’s are good as the returns are linked with the market and provide higher returns than FD. But they don’t know that the returns of ULIP’s are much lower than mutual funds.

How agents and companies make you fool?

The insurance agent is motivated to sell products which give a higher commission. The agent is not motivated to sell term plans because they provide very low commission due to lower annual premiums. That’s not good for you.

Further, there is marketing blitz. They market the bad and ugly (Whole Life Insurance) with smarter words that beats the logic. Lets see some example.

Gimmick 1

Whole life insurance is a type of permanent life insurance, which stays in effect for as long as you pay the premiums. This means you never have to worry about un-insurability or losing your safety net as you get older.

Truth

They are collecting your money right? Of course it is permanent as long as you pay. Why would they stop you? Your money is income for the agent (as commission). Plus the “risk cover” in case of eventuality is very low, approx. 5% to 10% of what they get in term plans.

Gimmick 2

It depends on the type of policy that how exactly the cash value works. For example, in a variable life policy, the cash value acts like a mutual fund, but with whole life insurance, it’s more similar to a simple savings account.

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Truth

They don’t tell you the details of charges & high expenses. “Depends” is the best you get. Mutual funds is thrown in to keep your imagination flying on returns but the “depends” eventually will kill you with the returns of a simple savings accounts with lots of costs, expenses & commissions deducted.

Gimmick 3

Which plan would you pick from the table?

Obviously the second plan is for “whole life”, has “guaranteed cash value” & earns interest. It is so obvious that you will choose that. SOLD!

Truth

You need agent to cover your risk with “high sum assured” for your family to survive on. Don’t open another savings account for yourself with poor risk cover.

Guaranteed death benefit? Amazing. You have deposited money all along, so of-course you will get some part of your money back to your family but after deducting the profits & costs of agent.

Earns a predetermined interests? You can get interest from a term deposit also at the bank. At least that will not have agent’s expenses baked in. You need to cover your life risk & get a peace of mind at low cost. Then, why the complexity?

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Conclusion

Life insurance is very important but only the term plan is good. Rest of the endowment plans are money making instruments for the corporates.

Never mix insurance and investment. In fact, you don’t even need an agent to buy a term plan. You can directly go to the website of term plan providers and opt for the best term plan.

If you want to know how to select a good term plan, then mention it in the comment section. We will either contact you personally or write a new article particularly based on that. But don’t forget to like and share this article to everyone, this could be a life saviour for someone.

Thank you for reading this article,

Team BloggerBoy


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