The uncertainty of life often drives people to take out life insurance. Suppose you are the sole breadwinner of a household with a home loan and family responsibilities, and your sudden demise could leave them in a plight of mounting debt and financial crisis. Your one decision could decide their fate, even after your absence, whether you have taken insurance or not. In case you have, then your family's future is secure or not, depending totally on what kind of insurance you have opted for. Life insurance itself is a very broad term that offers different facilities and includes a premium that varies from plan to plan. This article will explore the different insurance plans along with their merits and demerits to help you choose a plan that best suits your condition.
First, clear the confusion: "life insurance" includes term insurance.
People often get confused when choosing between life insurance and term insurance. But actually, "life insurance" is a broad term that encompasses different forms of insurance plans, including term insurance. By mentioning life insurance vs. term insurance, what people are actually trying to do is distinguish traditional life insurance from term insurance.
What are term insurance and life insurance?
In a traditional insurance plan, you receive a sum of money along with returns after the completion of the period, regardless of whether the insured person is alive or dead. In term insurance, however, you only receive the insurance amount when the insured person dies during the given period. The former costs a much higher premium — close to ₹50,000 a year — with returns of 5 to 6% on a sum assured of around ₹10 lakh for a 20-year period, whereas the latter charges only around ₹10,000 to ₹12,000 per annum for a 20- or 30-year period with ₹1 crore coverage.
Who should buy what—the life-stage guide
If you are someone who is in their twenties and holds the full responsibility of the family, whether as a working professional, entrepreneur, or businessman, and intends to secure the family's future in your absence, then term insurance is most suitable for you.
Generally, the premiums on term insurance are very low, around ₹10,000 to ₹12,000 per annum, with coverage of ₹1 to ₹2 crore for 30 years. Although there is no maturity benefit if the nominee outlives the policy, the main purpose of this plan is to secure the family's future rather than to view it as an investment or savings.
For saving or investment purposes, a traditional life insurance policy seems much better. Here you can opt for lifetime coverage, which comes with a higher premium relative to term insurance. After the maturity of the policy, the insured person or the nominee receives the sum assured along with a bonus.
How much cover do you actually need?
To calculate the amount of coverage you need, there is a simple formula. Suppose you are a person with an annual income of ₹8 lakh and possess a debt of ₹30 lakh. In addition, you have savings or investments of ₹10 lakh.
Multiply your annual income by 15 to 20. Then add any outstanding debt to that amount, and subtract your existing savings and investments. The final number is the coverage you should opt for in term insurance.
For instance:
Income: ₹8 lakh p.a. ₹8 lakh × 20 = ₹1.6 crore. ₹1.6 crore + ₹30 lakh = ₹1.9 crore. ₹1.9 crore − ₹10 lakh = ₹1.8 crore.
How to pick the right insurer — the two numbers that matter
Once you have decided on term insurance, the next step is choosing the right insurer. Two numbers tell you almost everything you need to know.
The first is the Claim Settlement Ratio, or CSR. This is the percentage of death claims an insurer actually pays out in a given year. A CSR above 98% is considered good. As per IRDAI data for FY 2023-24, Max Life leads at 99.5%, followed by HDFC Life at 98.7%, LIC at 98.5%, and ICICI Prudential at 97.9%. A high CSR means that when your family files a claim, it is very likely to be honoured.
The second number is the solvency ratio—a measure of the insurer's financial strength and ability to pay claims in the long run. IRDAI mandates a minimum solvency ratio of 150% for all insurers in India. When comparing plans, always check that the insurer comfortably exceeds this threshold.
One practical tip: buying a term plan online directly from the insurer's website is typically 20 to 40% cheaper than buying through an agent, because there is no commission involved. The coverage is identical — only the cost differs.
Tax benefits — quick and honest
Whether you are opting for life insurance or term insurance, one benefit available in both plans is a tax deduction. Under Sections 80C and 10(10D) of the Income Tax Act, investments of up to ₹1.5 lakh in insurance premiums are deductible from taxable income. However, as term insurance premiums are low, you may need to invest in other eligible instruments to fully utilise the ₹1.5 lakh limit.
There is no better investment than the one that secures the future of your family. For that, it is highly preferable to opt for term insurance, which provides high coverage at a very low premium. Instead of investing ₹50,000 per annum in a traditional life insurance plan that offers returns of only 5 to 6%, you can spend ₹12,000 a year on term insurance and invest the remaining ₹38,000 in a mutual fund that could build a good corpus with historical returns of over 10%.
This article is for informational purposes only and does not constitute financial advice. Please consult a SEBI-registered financial advisor before making any insurance decisions.
