Why a term cover is better than a whole of life insurance

Dubai - Smart ways to manage your money

The pandemic has had a marked impact on people’s behaviour towards financial protection. Many have become sensitive to the need of building an emergency fund and having policy covers that can protect their loved ones.

According to a recent YouGov survey commissioned by Zurich, more than half of respondents said they were somewhat likely or extremely likely to consider purchasing life or critical illness cover, with more than 63.3 per cent of respondents aged 18-34 years saying they purchased life insurance since the start of the global crisis.

Life insurance is one of the most important financial products for a family. But considering the plethora of options available, buyers often evaluate the worthiness of a life insurance policy by equating it with investment products. ‘What will we get at the end of the term,’ is often the question asked. Or why should I buy a cover only until 75 years of age, why not for whole life?

Well, a simple answer to such queries is to truly understand the relevance of insurance and not find convenience of investment returns through it.

Financial ingenuity in insurance space has allowed mushrooming of products. We have term insurance, which is essentially a pure life cover, and then there are products that double up as investment vehicles (with whole of life, endowment, and ulips being popular choices). A term cover is the cheapest and the most cost-effective insurance available and should be the preferred choice for any discerning buyer.

“If you are someone who is worried about the financial future of your family, consider investing in a term insurance policy. It is one of the purest forms of life covers that provides financial protection to the policyholder’s nominees or family upon his/her untimely death. It provides coverage during a fixed period of term/time, and offers a high sum insured at a reasonably low premium compared with other life insurance policies,” says Neeraj Gupta, CEO, Policybazaar UAE.

Term plans score above endowment, ulips and whole life plans because of its simple structure. The insurance companies charge you only for providing insurance in case of a term plan whereas in other policies there are sundry charges for investment, surrender, premium allocation, commissions to agents, and the usual mortality and expense risk charge.

Take this for instance. A term policy with Dh2 million life cover for a 35-year-old female will cost around Dh2,800 annually. Comparatively, a life cover promising bonus on maturity of the policy and charging the same premium (Dh2,800 per annum) will provide a life insurance of just Dh750,000. The lure of a maturity bonus or a payout eats into the insurance cover and should be resisted.

Buying a life cover should not be just a tick in the box. It is important to know the reasons for the choice you are making.

Below are a few points suggested by Gupta when buying a life insurance policy:

1.Compare term plans: Always analyse plans offered by various insurers before buying term insurance. You can use a term plan calculator to review aspects, such as the tenure, premium, and sum insured of different term plans.

2. Ascertain the sum insured: The sum insured is the amount your family will receive in case of any unfortunate incident. Make sure it is significant enough for your family to live a stress-free and financially independent life. Ideally, as you grow in your professional life, you should keep reviewing this amount and add more policies, if needed.

3. Policy period: One should choose the maximum available policy period. Doing this will ensure a relatively lower premium. Also, it is best to opt for the annual premium option.

The sole purpose of buying a life cover is to ensure that financial needs of your loved ones are taken care of should something happen to you. Only a term plan can provide them maximum comfort, not a whole life or an endowment plan.

suneeti@khaleejtimes.com