How do I choose a life insurance contract?

A life insurance is not a protection against your life itself, but a protection against the finances of your family in the scenario of your untimely death.

· 2 min read
How do I choose a life insurance contract?
image credits: HDFC Life

It is always worth remembering that life is short. In an event of your (god forbid) unfortunate early demise, you may leave any dependants in a difficult situation. For example, if you are the only earning member of a family consisting of you, your parents, your spouse and your kids, the scenario of an unfortunate death will leave them in a lot of trouble.

In case of such a scenario, it will be a life insurance contract in your name that will be present to protect your family. This is not a protection against your life itself, but a protection against the finances of your family in the morbid scenario.

There are two major types of life insurance that you must be aware of before you decide on which one to pick. These are

  1. Term plan
  2. Endowment plan

and both of these will be covered in this article. If you are unaware of how insurances work, check out this article.

Term insurance plan

The simplest plan that is available for a life insurance contract - the term insurance plan requires you to pay a premium every month until either the term ends or you meet an unfortunate death. In the scenario of the latter, your family will be provided with the cover you signed up for when you bought the contract. However, in the scenario of the former, nothing happens; there is no maturity for this plan in case of no demise.

Now while this plan may sound like you're just spending money every month with no return of any sort if you make it out of the term duration alive, what makes this most preferred is that term plans allow you to spend the least amount per month in premiums. Plus, these premium amounts do not get adjusted to inflation and thus you will be effectively paying lesser premiums after every month.

For people in their early 20s, they can purchase term insurance plans of 20 or 30 years worth ₹10 crores for a monthly premium of just ₹7000-₹8000! This makes sense for the insurance companies too as the younger you buy your insurance, the lesser chance they have of actually having to pay out the cover, thus making it a cheaper contract for you.

Adding to this contract, there are also add-ons, called the 'disability add-on' and the 'critical illness add-on' which will provide for a mild cover (not as much as the initial promised amount in case of death) in case of either scenario. Note that this is not the same as a health insurance contract, another important insurance contract you must look to purchase.

Endowment plan

The endowment plan is similar to the term insurance plan, except that at the end of the term, the maturity amount will be given back to the customer. So buying this insurance can work as a SIP where you pay an amount in premium every month and at the end of the term you will be guaranteed an amount.

However, the result of this is that the premiums you have to pay end up being much more expensive and could be a liability to your monthly finances, even if you invest in an endowment plan at a much younger age. A 22-year-old may be able to buy a term insurance plan for ₹7,000 a month but might have to pay almost ₹20,000 a month for an endowment plan, depending on the insurance writer.

A smarter investor would prefer using the difference between the potential premiums paid for an endowment plan and a term plan for better investments.

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