Last month, my cousin called me at 11 PM. She’d been scrolling through insurance websites for hours and felt totally lost. “Why are there so many types? What’s the difference? Which one do I even need?”
I sat with her the next day and broke it down. Let me share what I told her.
What Exactly is Life Insurance?
Life insurance is basically a safety net for your family. You pay money regularly to an insurance company. They promise to give your family a large sum if something happens to you.
That’s the simple version.
The money your family gets can help them pay bills, clear loans, handle daily expenses, and maintain their lifestyle without you around. It replaces the income you would have earned.
My father bought his first policy in 1995. Back then, he didn’t fully understand it either. The agent just said, “Buy this, it’s good for your family.” Dad paid premiums for 20 years. When the policy matured, he got some money back. Not a lot, but something.
Today, there are many options. Too many, if you ask me.
Different Types Available
Term Insurance
- Pure protection, no savings
- Family gets money only if something happens during the policy period
- Nothing comes back if you survive the term
Traditional Plans
- Mix of protection and savings
- Part of premium covers your life, rest gets invested
- Money comes back after policy ends, whether you’re around or not
How Term Insurance Works
Term insurance is the simplest form of life insurance. You pick an amount – say Rs. 75 lakh. You choose how many years you want coverage – maybe 25 years. Then you pay a small monthly or annual premium.
If you pass away within those 25 years, your family gets Rs. 75 lakh. That’s it. Clean and straightforward.
My brother-in-law bought a term plan three years ago. He’s 32, doesn’t smoke, pretty healthy. He pays Rs. 780 every month for Rs. 1 crore coverage. That’s less than what he spends on weekend movies.
The catch? If he stays healthy and completes 30 years, he gets nothing back. Zero. Those premiums bought him protection for three decades. The job is done.
Some people hate this idea. “I’m paying all this money for nothing?” they say. But you’re not paying for nothing. You’re paying for peace of mind and family security.
How Traditional Plans Work
Traditional life insurance does double duty. It protects your life and builds savings at the same time.
Here’s what happens with your premium. Maybe 30% goes toward actual insurance coverage. The remaining 70% gets invested by the company in various places – government bonds, stocks, real estate, whatever.
After 15 or 20 years, the policy matures. You get back your premiums plus whatever the investments earned. Even if you’re perfectly healthy and never needed the coverage.
Sounds better than term insurance? Hold that thought.
My neighbour pays Rs. 8,000 monthly for a traditional plan. She gets Rs. 25 lakh coverage. Her friend pays Rs. 900 per month for term insurance and has Rs. 1 crore in coverage.
See the problem? Traditional plans cost so much that you can’t afford adequate protection.
Breaking Down Term vs Life Insurance
When people compare term vs life insurance, they usually mean term plans versus traditional savings plans. Let me explain what sets them apart.
Cost Difference
I called five insurance companies last week pretending to be a buyer. Just wanted real quotes.
For a 30-year-old non-smoker wanting Rs. 50 lakh coverage:
- Term plan quoted: Rs. 550 to Rs. 650 monthly
- Traditional plan quoted: Rs. 4,200 to Rs. 5,800 monthly
That’s nearly 8 times more expensive. Why? Because traditional plans invest your money. That investment service costs extra.
Coverage Amount
Most families need big coverage. Financial planners recommend having at least 10 times your yearly income. If you earn Rs. 6 lakh annually, you need Rs. 60 lakh coverage.
Term insurance makes this affordable. You can buy Rs. 1 crore or even Rs. 2 crore coverage without selling your house.
Traditional plans? Good luck getting enough coverage unless you’re really rich. The high premiums limit how much you can buy.
Money Back Feature
This is where things get emotional. People love getting money back. Makes them feel like they didn’t “waste” premiums.
Term insurance doesn’t return anything. Your premiums are gone, spent on protection.
Traditional plans return money at maturity. You get your premiums plus some returns. Feels rewarding after paying for 20 years.
But here’s what nobody tells you. That “return” is often disappointing. Many policies give 4-6% annual returns. You could earn more by putting money in a simple fixed deposit.
What Actually Matters
The real question is – what do you need life insurance for?
If your answer is “to protect my family,” then term insurance wins hands down. You get massive coverage at a tiny cost. Your family will actually be okay financially if something happens.
If your answer is “to save money,” then skip insurance altogether. Buy term insurance for protection. Invest separately in mutual funds or other options. You’ll do much better.
Mixing protection and savings sounds smart, but usually isn’t. You end up with weak protection and weak returns. Neither job gets done properly.
My chartered accountant explained it like this: “Would you buy a car that’s also a boat? Sounds cool, but it’s probably bad at both things. Buy a good car and a good boat separately.”
Final Thoughts
Insurance doesn’t have to be complicated. Buy term insurance for big coverage at a low cost. Your family stays protected without draining your wallet.
Whatever you decide, just buy something. Having inadequate coverage is bad. Having no coverage is worse. Start with what you can afford and add more as your income grows.
