Friend 1: What have you done for investments?

Friend 2: I have an SIP in place and then I also have a Term Plan, but that’s just protection, not a proper investment. I still like to call it an investment though.

Friend 1: Oh cool, you have a term plan?

Friend 2: Yes, I needed one.

Friend 1: Nice, I will get one too, in that case!

Wait, do you even need a term plan?

Get up and ask yourself. It’s always a good time to get a term plan, but the question here is, why are you buying it?

It is important to get your facts right, and a term plan, like all other investment propositions, definitely needs thorough research at the buyer’s end.

Friend 1, here, is clearly buying a term plan for all the wrong reasons.

News Flash: YOU DON’T NEED A TERM PLAN JUST BECAUSE A FRIEND NEEDS IT.

The lack of awareness about the term plan leads to people buying it for the wrong reasons listed below in this blog. In fact, chances are, that while going through this post, you might recall someone who purchased a term plan for one of the reasons mentioned here. What’s worse? You finding your reason on this list.

So without further ado, let’s find out what are the five most common (wrong) reasons for purchasing a term plan.

1. To save taxes

Many of us have this habit of procrastinating our yearly tax-saving investments to the end of the financial year. And it’s only when the HR sends out an email, or our CA advises us to make an investment, to avoid hefty tax deductions, that we start looking for tax saving investment options.

And being the finance novice we are, many of us often end up buying what’s the most conveniently available option - a term plan that we don’t know anything about. As a result, we tend to lose more money than save any, in the name of tax savings.

So the next time, you plan to buy a term plan, ‘only’ to save taxes, think twice!.

2. To help an insurance agent complete their target

Some of us are so generous that we don’t give it a second thought when it comes to helping someone. While helping someone is great, and we won’t advise you against it, but we would surely discourage you from buying a term plan simply because an insurance agent has been following up with you for months, or you need to help him with his targets.

Don’t think of it as your moral obligation to buy a plan from that agent. And let’s say if you did buy a plan from the agent today, who’s going to come to their rescue the next time? In fact, even if it’s a relative who has been after you to buy a term plan, learn to say ‘NO.’ And trust us, there’s no harm in it.

3. As a last gift to your family members

Many people buy a term plan thinking that it would be their last gift to their loved ones.  For them, it’s an investment that will get realized with the death of the life assured. That, however, is not the right reason for buying a term plan. The only reason you should be buying a term plan is that you have a family that’s dependent on you, and in the unfortunate event of you not being around, they might face a challenge to sustain themselves or lead the same lifestyle that they did, when you were around.

All-in-all, if you value yourself, and don’t want to be more valuable to your family while you are gone than when you were around, it is advisable that you don’t buy a term plan with the thought that it’s a sure shot lottery for your dependants.

4. Just because your friend bought one

Buying the same term plan with the same ‘sum assured,’ just because your friend bought it, is one of the biggest mistakes you could ever make. That’s because you and your friend may have different financial goals.

Let’s try to understand this with the help of an example. Raj and Rishi are two friends working in the same company, drawing equal salaries and with similar lifestyles.   Both, however, have different financial obligations. Raj has his own home, has no outstanding loan, but he must ensure that he has all the necessary arrangements to provide for his daughter’s education, if god forbid he isn’t around tomorrow. Rishi on the other hand recently got married and has an outstanding home loan. As Rishi has no kids his only concern is to ensure that his wife should be able to easily pay off the home loan, in case some mishap takes him away from her.

There are term plans as cheap as an apple a day and there are expensive ones for bigger goals. As both Raj and Rishi have different financial obligations, the sum assured and the payment term too (lump sum or staggered) would differ in their cases.

In the hope that you now understand why it’s not a good idea to go copy-cat on some other person’s financial decisions, we urge you to make the right financial choice for yourself!

5. The returns are great

The premium one pays is way too less as compared to the sum assured that a nominee receives on the death of the life assured. Some people, therefore, look at a term plan as a great investment avenue. This is certainly not a good idea.

The purpose of buying a term plan should not be to provide an investment income. The purpose should be to provide income to the dependants If something untoward were to happen to you.

The Way Forward

The idea of this post was not to dissuade you from buying a term plan but to discourage you from buying it without determining your financial goals and understanding the exact benefits the plan has to offer. Buying the wrong term plan, or buying one for the wrong reasons is not just a waste of money, but it also renders useless when one needs it the most. We would, therefore, urge our readers to educate their near and dear ones about the right reasons for buying a term plan. Ask them to buy term plans for reasons such as providing for their children’s education, to pay off outstanding debts, to provide a regular guaranteed income to their family members in case of an unfortunate demise of the breadwinner of a family. Moreover, make sure you are sufficiently covered.

AN May 83/18

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