The Term Insurance Dilemma: My Client’s Story

Today, I want to share an insightful experience I recently had with a client, one that highlights the importance of understanding term insurance.

I was attending a conference when my phone buzzed. It was a client Yashwant, who wanted to buy term insurance. His birthday was around the corner, and he was concerned that delaying the purchase would mean higher premiums. Since I was tied up, I asked him to connect with my assistant Bhanu Priya for guidance.

The Conversation Begins

Yashwant was happy when my assistant shared the quotation for a pure term insurance plan—?1,700 per month for a sum assured of ?1 crore. The premium seemed quite affordable to him, and he was initially relieved at the thought of securing his family’s financial future at such a reasonable cost.

Yashwant was intrigued by how affordable the premium was. But then came the pivotal question: "What will I get if I don’t die?" It was an emotional and logical concern many share—why spend money on something if there’s no tangible return at the end? This question set the tone for a detailed discussion, one that aimed to address both his financial and psychological apprehensions. He found it hard to justify paying premiums without any return.

Understanding Term Insurance

My assistant Bhanu Priya patiently explained:

• Purpose of Term Insurance: It’s a safety net for your family’s financial well-being in case of your untimely demise. It’s not meant to give you returns; it’s meant to provide protection.
• Coverage Period: The plan should ideally cover you only until your earning years, typically up to 60 or 65 years. By then, you’ll likely have built a strong financial foundation:
• Why No Return of Premium (ROP): Adding the ROP feature increases the cost significantly without aligning with the primary purpose of insurance.

Breaking Down the Numbers

Yashwant still wasn’t convinced, so we shared two quotations:

• With Return of Premium (ROP): ?3,700/month
• Without Return of Premium: ?1,700/month

Here’s what the math looked like over 36 years:

Why 36 years, you ask? Yashwant was 29 years old, and the coverage was designed to last until he turned 65, which aligns with the end of his earning years. This timeline ensures that his family is financially protected during the most critical phase of his life when responsibilities and liabilities are at their peak.

Without Return of Premium:

• Total Paid: ?734,400
• Payout (if required): ?1 crore (Sum Assured)

With Return of Premium:

• Total Paid: ?15,98,400
• Refund (excluding GST): ?13,54,576
• Payout (if required): ?1 crore (Sum Assured)

The catch? The ROP plan doesn’t refund the GST (?243,824), meaning Yashwant wouldn’t even get back the full premium he paid.

A Smarter Alternative

Bhanu Priya proposed a better approach:

Opt for the pure term insurance plan at ?1,700/month. This aligns perfectly with Yashwant’s financial goals. By choosing this cost-effective plan, Yashwant could secure his family’s financial future without stretching his budget unnecessarily. It ensured that in the unfortunate event of his untimely demise, his family would receive ?1 crore—a significant sum to cover any liabilities or future expenses.

Invest the difference of ?2,000/month (?3,700 - ?1,700) in a disciplined investment plan.

Here’s how the investment would grow:

• At 12% returns: ?1,23,69,795
• At 14% returns: ?2,04,12,159

Yashwant’s family would still receive the ?1 crore sum assured if needed, and in 36 years, he would have a significant corpus of over ?1.2 crore or even ?2 crore! This combination was clearly a win-win situation.

A Change in Perspective

After seeing the numbers, Yashwant realized the value of separating insurance from investment. The pure term insurance plan provided peace of mind, while the investment offered wealth creation for the future.

Key Takeaways

This story underscores an important financial lesson: Insurance and investment serve different purposes and should be treated separately.

• Pure term insurance offers cost-effective financial protection.
• Disciplined investments can help grow wealth over time.
• When combined thoughtfully, they create a comprehensive financial plan that’s both protective and rewarding.

Final Thoughts

If you’re considering term insurance, don’t just look at the immediate cost or the promise of returns. Focus on its primary purpose: safeguarding your family’s future. And if you’re tempted by the "return of premium" feature, run the numbers. You’ll likely find better ways to use your money.

What do you think of this approach? Have you faced similar questions? Share your thoughts in the comments below! Let’s keep learning and making smarter financial decisions together. ??