Term insurance or an investment plan: which protects your family better?
Ask most families how much life cover they have and the answer is a list of policies bought over the years. Ask what the family would actually receive, and the total is often far smaller than they need. Here is why, and what to do about it.
Two very different products
Term insurance is pure protection. You pay a premium, and if you pass away during the policy term, your family receives the sum assured. A standard term plan pays nothing if you survive the term. In return, the premium is low, so a large cover is affordable.
Insurance-cum-investment plans, such as endowment, money-back and many traditional plans, combine a smaller life cover with a savings element. Part of the premium pays for cover and costs, and the rest is invested. The premium is much higher for the same cover.
How much cover does your family need?
A simple, needs-based way to think about it:
- Household expenses for the years your family would need support, adjusted for inflation;
- plus outstanding loans, such as a home or car loan;
- plus future goals you want funded, such as children’s education or a wedding;
- minus existing cover and savings your family could use.
| Yearly household expenses | ₹6 lakh for 20 years |
|---|---|
| Today’s value of those expenses | ₹1.01 crore |
| Outstanding loans | ₹25 lakh |
| Future goals | ₹30 lakh |
| Less existing cover and savings | ₹20 lakh |
| Additional cover needed | ₹1.36 crore |
An estimate only, assuming 6% inflation and an 8% return on the payout. Final cover depends on underwriting and your full circumstances.
A practical approach many families follow
- Protect first. Cover the earning member with adequate term insurance until the family’s main goals are funded.
- Invest separately. Build wealth for goals through suitable investments such as mutual fund SIPs, chosen for each goal’s time frame.
- Don’t forget health cover. A hospital bill can drain savings faster than almost anything else.
- Review existing policies before stopping any of them. Surrendering early can mean a loss, so look at the numbers first.
Check your family’s number
Use the Life cover calculator to estimate your own figure, then talk to us about the options that fit. Insurance is the subject matter of solicitation. Please read the policy wording carefully before buying.
Try your own numbers
The examples above use assumptions. Your family’s figures will be different.
This article is general information for education, not a recommendation to buy or sell any product. Figures are illustrative and not guaranteed; they depend on the assumptions shown. Mutual fund investments are subject to market risks, read all scheme related documents carefully. Past performance is not indicative of future returns.