Why is Term Insurance Known as ‘Pure Insurance’

Sep 19, 2019 | 2 months ago | Read Time: 3 minutes | By iKnowledge Team

Urvi was looking at life insurance policies to invest in and while doing her research, she stumbled on term insurance. Her first question was, ‘What is a term plan?’ Her insurance advisor had not recommended that plan, and yet the sum assured for the plan was double the sum assured for her insurance policy at a lesser premium. Urvi inquired further and was told that term insurance was pure insurance and there would be no returns from it.

The understanding that people have about term insurance is that it is a policy where there is no return. Since a term plan does not pay out anything unless the insured event happens i.e death, or disability, or accidental death, it takes some pondering before purchasing term plans.

What is term insurance?

A term insurance policy is a policy which has no maturity benefit. This insurance policy pays out the sum assured only on death of the assured. A term plan’s premium is allocated entirely to covering the risk of life i.e to cover the life of the assured. This means there is no saving component to it. Therefore, it is also called as ‘pure insurance’

A term plan offers a higher sum assured for an affordable premium since the policy is purely covering the risk of loss of life. In that sense, a term plan is like other insurance policy i.e. health, motor, fire, marine etc. These are pure insurance policies where the premium covers the risk of the event happening. If the event does not occur, there is no payout.

How is it different from endowment or ULIPs?

Under endowment plans, a part of the policy is invested by the insurance company in saving instruments. The return on these instruments is accumulated and paid out to the policyholder. In a ULIP (Unit Linked Insurance Plan), a portion of the premium is invested in different funds of the policyholder’s choice. The fund value keeps growing based on the growth of the market.

An endowment plan or a ULIP is more expensive as compared to term insurance because of the inherent savings component. Since an endowment plan promises a maturity value, it requires a certain amount of investment on the insurance company’s part to meet those obligations. This is the reason why the premium amount is higher.

It is certainly not to say that endowment plans or ULIPs are not insurance products to be looked at. These insurance products can be looked at to fulfill different life goals. ULIPs can be an excellent option to provide and protect for a child’s education. If the parent dies during the premium paying term, the future premiums are discontinued, and the child receives the sum assured on maturity. The family also receives a death benefit. In case the parent survives, the sum assured is paid as a maturity benefit, which can be used to fund the child’s education. This combination of two life goals makes it an attractive investment option.

How does term insurance work?

Since a term insurance policy is a typical insurance policy, or a protection against risk, it works like other insurance policies, where premiums from many customers are pooled in collectively. The risks of claiming are combined for all the term insurance customers together, thus reducing the risk of claims overall. Since the overall risk for term insurance customers is low, term insurance premiums are affordable even with a higher sum assured.

Typically, it is possible to get assured for Rs. 2 crores by paying a premium as low as Rs. 20,000 or even lower depending on the insurance company. Such premiums are not possible in traditional insurance plans since they cover the cost of investment along with the cost of assuring the life of the policyholder.

The Aegon Life website has a term insurance premium calculator which can tell you the premium based on age and income parameters.

A term plan is an excellent investment which provides financial security at an affordable cost. Have you invested in a term plan yet? To know about Aegon Life’s life insurance products like health insurance and other products, visit our home page.


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