Life Insurance

What is the Most Cost-Effective Life Insurance Type?

by SMCIB on Wednesday, 05 April 2023

What is the Most Cost-Effective Life Insurance Type?

The world is moving at a fast pace and so is life. With unpredictable twists and turns around every corner, it is crucial to safeguard your and your family’s financial future.

When it comes to financial planning, life insurance is an essential aspect that you cannot ignore. It not only serves as a financial safety net for you and your loved ones but also helps you realise your short-term and long-term goals and milestones. With the right life insurance policy, you can have peace of mind knowing your dreams are secure and your loved ones will be taken care of.

Life insurance is a long-term commitment. Therefore, it is important to choose a policy that is both cost-effective and provides adequate financial protection. However, the market today is flooded with a variety of options, making the decision-making process complex.

In this article, we will explore the types of life insurance policies and help you determine the most cost-effective one that can meet your financial needs.
 

What is Life Insurance?
Life insurance is a contract between you and the insurance company that offers to cover your financial risks, providing you with a sense of security. In exchange for this protection, you are required to pay a fee, generally known as a ‘premium’.

If you, unfortunately, pass away during the policy tenure, the insurance company promises to pay a sum of money to your family members called the ‘sum assured’. It is a way of ensuring that your loved ones will be provided for, even when you are no longer around.

Life insurance primarily serves as a means to safeguard your family's financial future in the event of your absence. Additionally, it can be an invaluable tool for long-term savings to attain financial objectives such as retirement planning, funding your child's education or wedding, etc.
 

Types of Life Insurance
Life insurance comes in many types. Let’s have a look at the various life insurance plans available in the market -

Type of Life Insurance

Purpose

Whole Life Insurance

Whole Life Insurance provides insurance coverage up to the age of 99 or 100 years, therefore typically providing coverage for your entire lifetime. Given the fact that any human being is less likely to live beyond this age, Whole Life Insurance is a reliable method of guaranteeing your loved ones a financial inheritance or parting gift if you, unfortunately, pass away during the policy term.

Term Insurance

A pure risk protection plan. If you pass away during the policy tenure, a fixed sum of money is paid out to your family. This payout can be used to cover any outstanding loans, mortgages, children’s education expenses, etc. It  even assists your family members with their day-to-day expenses like rent, groceries, utilities, etc.

However, if you survive the policy term, you don’t get anything.

Child Insurance Policy

A blend of insurance and investment that enables you to save money systematically and accumulate wealth for your child's future needs and milestones. It provides adequate returns while also ensuring your child's protection in the unfortunate event of your passing away.

If you pass away, the insurer waives any pending premiums, while the benefits remain intact.

Endowment Policy

A unique blend of insurance and savings. It provides financial protection for your family while helping you build your wealth over time. By investing systematically in a low-risk instrument, you receive a lump sum amount of money after a predetermined period. You can use this lump sum amount to fund goals like buying a vehicle, your child’s university fees, retirement planning, etc.

Money-Back Policy

A dual-purpose plan that combines both insurance and investment aspects. The insurance aspect secures your family's financial future, while the investment feature offers guaranteed returns at designated intervals.

Regardless of market fluctuations, you receive a predetermined percentage of the sum assured or the annual premiums paid. The payouts essentially behave as a secondary source of income, which you can use to cover expenses like rent, EMIs, etc.

United Linked Insurance Policy (ULIP)

 

Work like mutual funds. A ULIP lets you invest in the stock market while providing you with insurance coverage.

A portion of the premium paid towards the policy is allocated to provide life insurance coverage, while the remaining amount is invested in market-linked investments.

These investments have the potential to generate high returns. Here, you have the freedom to choose from a range of funds to invest in, depending on your individual preferences and risk appetite.

One of the key factors to consider while purchasing life insurance is its cost. While there are various life insurance policies out there, which is the most affordable one? Let’s find out.
 

What is the Most Cost-Effective Life Insurance Type?
Term life insurance is the most economical form of life insurance as it acts as a pure risk protection cover. Term life insurance is specifically designed to provide financial coverage during the period when you have significant financial responsibilities and financial dependents who rely on your income.

If you pass away during the policy term, your family will receive a fixed sum of money from the insurance company. The death benefit paid out by the insurance company can be used to settle expenses such as loan repayments and day-to-day living expenses. However, if you outlive the policy duration, the insurance company will not pay any benefits.

Term life insurance is a simple and straightforward product. As a result, it can be an excellent option for those looking for an economical and efficient way to protect their families.

For example, Rahul, 30, lives with his spouse and two children. He wants to save funds for his children’s higher education and secure his spouse’s financial future. So, he buys a term insurance policy with a sum assured of Rs 1 Crore for a policy period of 25 years. He needs to pay a premium of Rs 15,000 every year to keep the coverage active. He appoints his spouse, Megha, as the nominee.

In case Rahul passes away while the policy is active, his spouse will receive a death benefit of Rs 1 Crore as the death benefit. In case Rahul survives the policy period, he will not receive anything back.

 

Top Benefits Of Term Insurance

✅ Affordable Premiums
Term insurance policies offer affordable premiums. For term insurance with a sum assured of the premium is as low as Rs. 900 per month. This implies that for each rupee invested, your family will receive  Rs.1000, in case of your unfortunate demise during the policy term.

✅ Provides Financial Protection to Your Family
A term insurance policy serves as a great way to protect your family's financial security if something untimely happens to you during the policy term. The sum assured can act as an income replacement, assuring that your family's financial needs are met without them having to compromise their standard of living and future dreams. 

✅ Highly Customisable
Term insurance provides the space for customization. You have the option to tailor a policy according to your specific requirements.

For instance –

  • You can opt for the limited pay option if you want to pay off your premiums in 10-15 years.
  • If you want an automatic increase in your term insurance coverage over time, you can choose the increasing cover feature.
  • If you want your family to receive the payout in the form of monthly instalments instead of a lump sum, you can easily customise your term life insurance policy payout accordingly. 

✅ Covers Death Globally
A term insurance plan covers all types of death, no matter the location, throughout the world. The only exception is suicide during the first year of purchasing the policy.

✅ 3-Year Claim Payout Guarantee
According to Section 45 of the Indian Insurance Act of 1938, if you regularly make premium payments, a term insurance policy guarantees a claim payout once it completes 3 years of continuous coverage. As per the law, the insurer cannot reject or investigate a death claim on the basis of fraud, misrepresentation, or suppression of facts.

✅ Dual Tax Advantages
You can enjoy tax benefits on both the premiums paid and the payout received from a term insurance policy.

  • Term insurance premiums are eligible for tax deductions up to Rs.1,50,000 under Section 80C of the Income Tax Act of India, 1961.
  • If you pass away during the policy term, the claim amount received by your family is exempted from taxation under Section 10(10D) of the Income Tax Act of India, 1961.

 

To Conclude,
Life insurance is a crucial financial decision. So, it is important to choose a policy that not only fits your budget but also meets your and your family's financial needs. While there are many types of life insurance to choose from, term life insurance is undoubtedly the most cost-effective option. By providing pure risk protection cover, it stands as one of the best ways to secure your family’s future.

 

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