Choosing a financial safety net for your family can be overwhelming, given the wide variety of options available in the market. One is often spoilt for choice with the numerous options on offer. It is important to understand the two most common types of financial protection plans, namely, pure-risk protection and savings-cum-protection plans and decide which one best suits an individual or family based on their unique needs, requirements and financial goals.
What Is a Pure Protection Cover?
Pure protection plans are meant for those who wish to provide maximum financial support for their dependents in case of an unfortunate event such as death during the policy period. With the help of a term life insurance plan, for instance, an individual is able to lock in a certain amount of coverage (sum assured) in exchange for regular premium payments to the insurer. A term plan can be likened to a rented product. In case of an individual surviving the policy term, the money paid in the form of premiums is not returned to the policyholder as there is no maturity benefit. Premiums of such plans tend to be significantly lower when compared to savings plans. Pure-risk protection plans enable even lower-income groups to get adequate financial cover at an extremely low annual premium.
Key features of pure protection plans:
Here are some crucial features to know before you buy term life insurance plan:
- High coverage at an affordable premium: Pure protection plans offer a relatively high sum assured as compared to the premiums that need to be paid to the insurer.
- No maturity benefit: In case of survival till the end of the policy term, the policyholder does not receive any maturity proceeds.
- Financial support: The primary objective of a pure protection plan is to ensure that the dependents or nominees are able to meet their financial obligations.
What Is a Traditional Savings Plan?
Traditional savings plans are a combination of savings/protection and investment. Policies of this category offer a combination of risk cover and guaranteed returns. Endowment and money-back plans come under the category of traditional savings plans. Under traditional savings plans, a proportion of the premium goes towards offering risk coverage to the insured while the remaining amount is invested by the insurer to generate returns. Traditional plans offer a maturity benefit on completion of the policy term by the insured. The maturity amount received by the policyholder is the sum of the accumulated cash value of the policy along with any bonuses declared by the insurance company.
Key features of traditional plans:
- Savings/protection and investment: Traditional plans offer a combination of risk coverage along with a maturity benefit.
- Higher premium: Since traditional plans offer a combination of risk coverage and investment options, the premiums tend to be higher when compared to pure protection plans.
- Guaranteed returns: Traditional plans offer relatively lower returns because the returns are generated by the insurers by deploying the money in the safest instruments such as government and corporate bonds.
Illustrating the difference in terms of pricing:
Let us say that an individual wishes to get a one crore coverage plan. For an average 30-year-old non-smoker, a pure-risk term plan would cost approximately ten to twelve thousand rupees per annum. On the other hand, an endowment plan with one crore coverage would cost several lakhs of rupees per annum. Therefore, an individual with an annual budget of say, thirty thousand rupees, for example, would be able to get significantly higher coverage under a term plan as compared to an endowment plan with limited coverage. Financial planners often suggest that it is a good idea to keep insurance and investment separate. This would mean that an individual can buy an affordable pure protection cover while investing the rest in other avenues such as mutual funds, PPF and FDs.
Things to consider before making a choice:
Every individual or family has unique needs, requirements and financial goals. Therefore, an individual must consider all aspects before buying a financial protection plan. Some of the key factors that should be taken into account before buying a plan include:
- Assess your liabilities: An individual should assess various financial liabilities, such as home loans, children’s education and other expenses and choose a plan that offers maximum coverage.
- Underwriting norms: It is important to understand that insurance companies offer different premiums based on age, health, occupations and lifestyle of the individual. Therefore, an individual must take into account the risk profile and the underwriting norms followed by the insurer.
- Read the fine print: An individual should go through the policy document thoroughly in order to understand the inclusions and exclusions offered under a plan.
Please note that all terms, conditions, riders, exclusions, benefits and other terms are subject to the respective general terms and conditions of the insurance company.
Income Tax considerations:
When it comes to income tax considerations, individuals should take into account the latest income tax rules and regulations and utilise the available tax-saving options. When it comes to life insurance, for instance, individuals can claim tax deduction on the premium amount paid under the relevant sections of the New Income Tax Act, 2025. Under the New Income Tax Act, 2025, an individual can claim a deduction on the premium amount paid for a life insurance policy, subject to an overall limit of one and a half lakh rupees in a financial year under section 123 (new section replacing section 80C and others). Also, additional deductions may be claimed under section 126 (new) in relation to health-related riders attached to a life insurance policy.
Tax rules are subject to change, and applicable deductions largely depend on an individual’s income and tax-saving needs. It is therefore important to consult a tax expert or a financial advisor in order to determine one’s eligibility for claiming deductions under various sections of the New Income Tax Act, 2025 and make the best possible choice in terms of buying a financial protection plan.
Conclusion:
Choosing between a pure protection plan and a traditional savings plan often boils down to individual preferences. If someone wishes to have maximum financial cover for his/her dependents, he/she should consider a pure protection plan. On the other hand, if someone prefers a more disciplined approach towards his/her savings and wishes to get a lump-sum amount at the end of the policy term, a traditional savings plan may be a better option. It is advisable to compare and contrast one’s options and choose the one that offers financial security and peace of mind.