When we plan our investments, a big question comes to our mind. Where to invest and how to invest. The usual answer that experts will give you is that you should diversify your investments considering several different options. Now, investment doesn’t need to be a method to increase your wealth, but it could also be a safety net for your family in case something unforeseen happens to you. Exactly that’s what life insurance do.
Life insurance can be of two types: term life insurance and whole life insurance with both having their pros and cons.
Understanding what term life insurance is
When we talk about term life insurance, it’s different than whole life insurance in several ways. However, in general life insurance is a great way when you are dealing multiple financial obligations including mortgage, kids and debts. Term life insurance is even more useful as it’s more affordable while providing a tax-free safety net for your family.
So, what exactly is a term policy, let’s see:
It is a type of insurance where you are covered for a specific period called ‘term’. If the insured person dies within that term (and policy is active) an amount known as death benefit will be paid.
Death benefit is a lumpsum as mentioned in the policy which the beneficiary is eligible to receive in the event of the insured’s death. Beneficiary is the nominated to receive this amount, and could be a family member, a non-related person like a business partner, or a trust or NGO. There can also be multiple beneficiaries as well.
The term is the period for which the policy stays active. It’s named so because once this period is over uneventfully the insured person will no longer be covered and you will have to purchase a new term insurance.
Positives and negatives of term life insurance
Pros
1. It provides a hefty lumpsum amount which can be used for any purpose including funeral expenses, children fees, paying off outstanding loans and living expenses for the future of your family. Best thing is that it’s tax free.
2. The terms and conditions in a term insurance are much easier and straightforward than any other type of insurance or investment.
3. Term insurance has a very minimal premium to be paid thus making it the most affordable insurance.
Cons
1. Term insurance ends at a fixed point of time. As soon as the term is over, you’re not covered. Though, you can always renew or buy a new one, but it’s much costlier than before.
2. No returnable lumpsum at the end of term if the insured person survives the term. This is quite unlike a whole life insurance where you get the sum assured given as a lumpsum once the policy is matured.
So, it is worth buying a term insurance
There is n doubt that term insurance has its usefulness. If the insured person dies during the term, the beneficiary will get a proportionately higher tax-free amount of money in comparison with whole life insurance. However, you should always divide your money between both the term and the whole life insurance for maximum benefit.
