What is the difference between term insurance, life insurance and health insurance?

There is a lot of confusion when it comes to insurance. Some people think that insurance is all about LIC in India. This is similar to Maggie which is a noodle but we don’t say that we want noodles. We say that we want Maggie. That’s the result of great marketing

So, let’s try to clear the confusion (and bust some myths) about “insurance” in India.

Insurance is broadly classified into the following categories:

1. Life Insurance
2. Health Insurance
3. Auto Insurance
4. Property Insurance

In this answer, we will discuss life insurance and health insurance.

Life Insurance: Let’s say you have a family of 4 with a wife and 2 children. You have a home loan of 40 lakh and your wife is a homemaker. It means you are the only bread earner in the family. Your kids are 5 and 7 years old. You have a total investment of 10 lakh in FD, mutual funds, etc.

Unfortunately, if something happens to you then-

• Who will provide financial security to your family? Will 10 lakhs be enough?
• Who will pay the home loan EMI?
• Who will provide the education to your children?
• Who will feed your family?

That’s exactly the reason why we need life insurance. To make sure that tomorrow if something happens to us, our dependents do not have to worry about money.

However, unfortunately, Insurance has become a business where companies are fooling people just for the sake of profit. Today, most of the people in India are trapped in such bad insurance products.

How do you know if the insurance is good or bad?

If the insurance is purely to provide financial comfort to the family after the death of the insurer, then it is a good product. These products are called Term Plans.

Wait…what will happen if nothing happens to you till a certain age? The money is lost, right?

What if there is an insurance product that provides financial support to the family in case of death and also provides a return in case nothing happens after a certain age? That’s a win-win situation, right?

Wrong!

This is exactly the reason why people fall into the trap of insurance products where they end up mixing insurance and investment. Such products are called endowment plans, ULIP plans, etc. They provide both options of financial support in case of death as well as returns if nothing happens until a certain age.

Corporates would come up with a various product name like Jeevan Anand, Jeevan Rakshak, Money Back, etc. but either they are term plan or endowment plan or ULIPs. But all products are bad except term plans.

But why are they bad?

The reason in the “Annual Premium”. Companies are not doing any charity by giving multiple benefits. They compensate for this by charging very high premiums. The premiums are so high that if you try to calculate the annual return
(which very few people know how to do it) you will realize that the returns are even lower than FD. The reason is due to multiple levels of commissions including the insurance agent commission and company’s own commission. No wonder why LIC is such a big company today.

Moreover, the insurance agent is motivated to sell products which give a higher commission. The agent is not motivated to sell term plans because they provide very low commission due to lower annual premiums. That’s not good for you.

Some people would say that ULIP’s are good as the returns are linked with the market and provide higher returns than FD. I would say that ULIP’s are still bad. This is because the returns of ULIP’s are much lower than mutual funds.

When what should you do?

Take a term plan for life insurance and invest the rest of the money in various other options like mutual funds, FD, PPF, etc.

Conclusion: Life insurance is very important but only the term plan is good. Rest of the endowment plans and ULIP plans are money-making instruments for the corporates. Never mix insurance and investment. In fact, you don’t even need an agent to buy a term plan. You can directly go the website of term plan providers and opt for the best term plan. (You can read this answer to know how to select a good term plan).

Let’s discuss health insurance with the same example.

Let’s say you have a family of 4 with a wife and 2 children. You have a home loan of 40 lakh and your wife is a homemaker. It means you are the only bread earner in the family. Your kids are 5 and 7 years old. You have a total investment of 10 lakh in FD, mutual funds, etc.

Tomorrow, if you fall sick or met with an accident (life is unpredictable) and you end up with hospitalization for few days with a total bill of 1.5 lakh including operation. In this case, how are you going to pay the bill? Are you going to break your investment? You might have been saving and investing to buy a car or save for child education or retirement. That would directly impact your financial goals.

A lot of people end up breaking their investment or even borrow money from friends or relatives. That’s sad, isn’t it? In fact, healthcare cost is ever increasing. A small health problem could literally wipe out all your savings.

How to avoid this situation?

Opt for medical/health insurance which provides health coverage to your entire family. In fact, the facilities of health insurance are so good that you don’t even need to pay any upfront money. They have a tie-up with major hospitals and everything goes cashless. No headache of arranging the funds. (I hope you always stay healthy and don’t have to deal with this.)

Conclusion: Opt for good health insurance and avoid unexpected expenses due to health issues.

I hope this answer helps in getting a good picture of various insurance terminologies and what is important and more importantly- what to avoid.

Thanks.

Source : Sahil Bhadviya