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Term Insurance policies turn complex, tricky and dangerous

As you know, Term Policies are the simplest, cheapest and the best form of insurance to take life cover.

Here, it is important to note that "cheapest" is not to be confused with "inferior". No, the low cost does not make the term plans inferior to other types of insurance policies, in any manner whatsoever.

In fact, term policies serve the primary purpose of an insurance plan i.e. to cover the risk to one's life. To this, if you add the feature called "investment", you get all other types of insurance policies such as endowment, moneyback, ULIPs, etc.

In other words, term plans are the 'pure-risk' insurance policies; whereas the others are a combo 'risk-cum-investment' policies.

For various reasons, you will generally earn lower returns on this investment component in an insurance policy, as compared to putting the same money in pure investment products (such as PPF, post office schemes, debt mutual funds, equity mutual funds, deposits, bonds, etc.).

As such, it is normally prudent to keep insurance and investment separate. So you are typically advised to buy (a) the term plan to cover the life risk and (b) pure investment products to earn better returns.

Now, for a given amount of sum insured and policy term, premiums in 'risk-cum-investment' policies are around 15-25 times MORE than the term plans. Since the earnings of the agents and the insurance companies is linked to the premium collected, you can well imagine why they never talk about term plans. You will always be sold endowment and moneyback types of policies.

But with the increase in general awareness, people are nowadays demanding term plans. 

In fact, this has made the insurance companies launch the so-called "online" term plans. These are sold directly to you, without the involvement of any agent or an intermediary. (Important: This makes the cheap term plans even cheaper as there is no expense on the agent's commission. So, as on date, it the best way to cover your life risk. Must Read: 'Buy only Term Plans...and buy them the Smart Way')

Hence, to ensure that they make good money even on the term plans, insurance companies have introduced many variants or add-on features, such as:

1. Return of premium option : If nothing happens to you during the policy term, on maturity you will get back the total premiums paid. But, as I had earlier warned, don't fall for this trap. 

2. Single premium plans : One-time payment of premium covers you for the entire policy term. Though this may sound convenient, again single premium is not a beneficial alternative.

3. Limited premium payment policy : A cross between regular premium and single premium alternatives, herein you have to pay the premium for a certain period, but the policy continues even thereafter for a specified no. of years. Well, again a no to this.

4. Increasing cover plans : This aims to cover for inflation. As time goes by, the day-to-day costs would go up due to the inflation. This policy offers progressively higher cover in the later years. But my contention here is that as time goes by, your corpus too may increase. So, logically, your need for insurance cover would actually reduce. So why pay more for the 'increasing cover' that you may not require? 

5. Staggered payout plan : In a normal term plan, the nominees get the entire sum assured upfront in case of the death of insured. Under this option, however, around 10% is paid upfront and the balance in monthly installments over a period of 10-15 years. Typically, the returns would be lower if insurance company manages the money on your behalf. In fact, a simple bank FD will probably give you higher returns (besides, the corpus is under your control, should you require a lump sum money anytime later.) So, it is better to take the full money upfront.

All these innovations have transformed the erstwhile sweet and simple term plan into a lot more complicated product. As you will appreciate, each of these options comes with its own set of pros and cons. And, more often than not, they will prove to be a costly alternative.

Accordingly, it is strongly advised that you should thoroughly evaluate whether these are good for you or not, before you sign on the dotted line... or, as the per latest trend, click on the Buy button.

Remember, it is a commitment running into 2-3 decades. So, please don't blindly fall for the agent's or insurance company's persuasive sales pitch. As is often said... 'Buyer Beware'.

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

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