Five Minutes to Understanding Term Insurance

But I don’t get any money back at the end of the term?
Do you ask for money back when you insure your car each year? And do you value your own life less than that of your car? If the answer is no, then you will stop looking at life insurance as a saving and investment instrument but use it just for protection.

Why is term insurance called the cheapest life cover?
Because you are paying for pure insurance and nothing else. All other polices have a savings component and the insurance company charges you fees to invest this money. In a perfect world, the insurance agent will split the insurance and the savings component of the total premium allowing you to work out a rate of return on your savings. However, no agents or company will do these numbers for you. Even in polices that promise money back, the insurance premium does not come back to you, just the savings component and return on it, does.

Why does my agent not tell me about this policy?
Because cheap term polices make his commissions, that are a percentage of your premium, very low. If a term policy, say for a 35 year old for 25 years for Rs 25 lakh, costs Rs 10,000 in premium each year, this premium amount will buy just a Rs 1 lakh money-back policy. Or to buy a money-back policy of the same tenure and amount, the premium will be about Rs 1.6 lakh per year. Sure you get some money back, but at what cost? The rate of return may not be comparable to what you could have earned if you had invested the difference on your own. The agent? His first year’s comission, at 30 per cent of your premium would be Rs 48,000 if you bought a money-back policy. It would be Rs 3,000 if you bought term. What do you think he will sell! And what should you be buying?