Started earning recently? Here’s how to spend it wisely using Zero cost term plan 

Started earning recently? Here’s how to spend it wisely using Zero a cost term plan 

Have you lately started earning? Did you ever consider investing a percentage of your monthly income in a life insurance policy or a mutual fund as soon as you started earning? No? Well, you’re not alone! Most people prefer partying, new clothes, trendy gadgets, restaurants, and movies as soon as they receive their pay cheques. Amidst everything, safeguarding your financial future takes a second seat. Your parents or elders may have asked you to cut back on excessive spending. They repeatedly remind you of the benefits of budgeting. And for the right reasons. In this article, we will go over ways on to spend wisely and how zero cost term insurance plan can fit into your planning.  

Reasons for Spending Smartly 

Although there’s nothing wrong with spending money on things you enjoy, it’s necessary to put some effort into planning for your aspirations, and protecting yourself and your family from unanticipated events. Here are five methods to manage your spending. 

Identify your current needs and future goals: How much money do you require on a daily basis? Do you have any immediate goals in mind? Ask yourself these questions to calculate how much money you need now and in the future. For example, you may have monthly utility payments to pay or a budget to set up. These are your daily financial necessities. You should also consider long-term ambitions. Let’s imagine you want to buy a house in the next ten years or establish a family in five years. 

Buy a life insurance policy: Your salary budget is incomplete without life insurance. Death, accidents, and disease usually happen without notice. When you are no longer able to provide for your family and children, they will suffer both emotionally and financially. This is especially true if you are the lone breadwinner in your household. Life insurance can be considered a way to “spend your salary wisely,” since it is primarily a tool for giving financial security to your loved ones in the case of your untimely death. 

A new life insurance category, zero cost term insurance policies, is making waves in the industry. For those who are unfamiliar, there are three basic types of term insurance : the regular term plan, which provides coverage for a set period of time; the term insurance plan with return of premium, or the TROP plan, which allows policyholders to receive premiums back if they survive the policy term; and, finally, the zero cost term insurance plan, which is a hybrid of the other two and allows policyholders to cancel their coverage and reclaim premiums during the term.

Though this final choice appears appealing, investors should read the fine print carefully. Furthermore, once you select a particular kind of policy, you cannot change to another. 

What sets Zero cost term insurance plans apart from other plans 

Before you proceed, there are a few differences to bear in mind. If the policyholder dies within the term of the typical term insurance plan, the nominee is entitled to a death benefit, which can be paid in lump sum or in regular installments. Since it is just pure coverage, there is no maturity benefit if the policyholder lives longer than the term. Term insurance plans are affordable while providing comprehensive coverage against life’s uncertainties. 

In TROP plans, if the policyholder dies, the nominee receives the sum assured. Alternatively, if the policyholder survives, they will get all premiums paid minus GST at maturity. TROP plans, on the other hand, often have higher premiums, which are approximately 1.8-2 times the cost of standard plans. 

Zero cost term insurance offers the return of premium feature at a lower cost. In such plans, policyholders have a one-time opportunity to exit upon fulfilling their financial commitments, getting a refund of all paid premiums minus GST. When the policyholder dies prematurely, the death benefit is paid to the nominee. 

What’s the catch? 

It comes with a higher premium. For example, a 30-year-old buying an zero cost term insurance plan will pay an annual premium of Rs 16,287 for a 2 crore term insurance. However, choosing a normal term plan till retirement at 60 would result in an annual premium of only Rs 12,686 over 30 years, saving Rs 1.08 lakh in premiums.

If incase the individual invested the difference of Rs 3,601 (SIP of Rs 300 per month) in mutual funds with expected returns of 12%, their corpus might grow to almost Rs 10.5 lakh over 30 years. Similarly, if the money were invested in an RD at current rates of around 8%, the returns would be Rs 4.5 lakh. That is practically the total amount of premiums paid for a typical plan. As a result, your normal term insurance plan can become completely free. 

And still, if you opt for the Zero cost insurance plan,  

Paying Rs 16,287 each year for 30 years will total Rs 4.89 lakh. However, after deducting 18% GST, which amounts to Rs 2,931.66, the total retirement return drops to Rs 4 lakh. While premiums are often tax deductible, the amount reimbursed may be taxable, depending on the plan and the tax slab you fall into.  

Hence, the premium for zero-cost term insurance is higher than that of a pure term plan. Higher to the point that if the difference is invested year after year for the duration of the term, even with a moderate return, the corpus will equal the premium paid. 

Who is it meant for? 

If you are, for example, in your early twenties and purchase a zero-cost policy with a term of 40 years or more, that is a decent advantage because you won’t lose anything by going for it. Those who are willing to accept higher initial expenses and complications in exchange for potential future benefits may want to pursue zero-cost term plans. Those who seek uncomplicated, low-cost coverage may find regular plans appealing. 

People who prioritize a return of premiums paid if they survive the policy term over the absence of maturity benefits in traditional term plans can consider buying this policy 

At last,  

Following these basic steps to manage your income can help you gain one of the most significant benefits of spending money wisely: financial freedom, among many others.