In personal finance, term insurance is often recommended as a valuable tool for securing a family’s financial future in the event of an untimely demise. Term insurance, known as pure protection, offers substantial cover at a relatively low cost, providing peace of mind to individuals who have dependents or financial liabilities. However, there are certain scenarios where buying a term insurance policy may not make sense.
Though many people rely on term life insurance as an essential financial tool, it may not be appropriate for everyone in different circumstances. This happens when a person doesn't have anyone else to rely on financially. Without any dependents, the main reason for purchasing term insurance comes into less focus.
“With no personal dependents, the primary objective of purchasing term insurance, which is economic protection in case of death, becomes less relevant. At this point in their lives, such funds could be better utilized in other, more pressing issues like saving for retirement or investing in high-yield securities. Budget constraints are another aspect to bear in mind because if the cost of term insurance premiums is too heavy on the individual, it might not be wise to sign up for a policy. It is better to have insurance that provides financial cover and peace of mind and does not cause any excess burden when it comes to the household budget,” says Prof (Dr ) Gurbir Singh Khera, CFA, IIMK Cornellian, Finance Professor at Fostiima Business School- Delhi.
“Whereby one clearly outlines the basic needs, and such needs are already proving to be a challenge in management, it is prudent to alleviate the concerns of acquiring other insurance, e.g., cheaper but effective coverage. Ultimately, the implementation of term insurance coverage will depend on the personal financial condition and the financial needs over a longer period,” he adds.
Here, we examine situations where forgoing term insurance could be a sound financial choice.
You Have No Dependents Or Liabilities
The primary purpose of term insurance is to protect dependents financially if the policyholder passes away unexpectedly. However, for individuals who do not have dependents or financial obligations, this coverage may not be necessary.
For instance, many people choose to live independently, whether by choice or circumstance and may have no immediate family relying on their income. If you are in this situation, it might be financially prudent to allocate resources elsewhere rather than toward a term insurance policy.
However, a word of caution: consider the future. If you might start a family later on, bear in mind that term insurance premiums increase significantly with age. Buying coverage in your 40s will likely be far more costly than it would be in your 20s or 30s.
You Have No Outstanding Liabilities
A major reason for obtaining a term insurance policy is to prevent leaving your family with financial burdens, such as home or business loans, in the event of your death. For example, if you hold a mortgage, a term insurance policy with coverage equivalent to the outstanding loan amount can protect your family from the risk of losing their home if they cannot manage the repayments alone.
On the other hand, if you are entirely debt-free and anticipate no need for loans, then term insurance may be an unnecessary expense. Individuals with no liabilities can often comfortably skip life insurance, especially if their assets and savings are sufficient to cover any unforeseen expenses.
You Possess Significant Assets
For individuals with a strong financial position, term insurance may not add much value. If you have built substantial wealth through investments or inheritance, your assets may already provide ample support for your family if you are no longer there.
For instance, a person who has built a sizable investment portfolio owns multiple properties, or has a high net worth can forgo term insurance without compromising their family’s financial security. However, it is crucial to consider the liquidity of your assets; assets such as real estate may not be as readily available in times of emergency compared to liquid financial assets like cash or stocks. So, it’s essential to evaluate your wealth in terms of both net worth and accessibility.
If You Only Want To Save On Taxes
Many individuals rush to purchase insurance to claim deductions and save on taxes. However, tax benefits should never be the sole reason to buy term insurance. There are several tax-saving investments—such as the Public Provident Fund (PPF), National Pension System (NPS), National Savings Certificate (NSC), and Equity Linked Savings Scheme (ELSS)—that may offer both tax savings and potential returns without the long-term commitment of an insurance policy.
Buying term insurance just to save on taxes can lead to regret, as this commitment spans years and can eventually become a financial burden if it doesn’t align with your needs. If tax savings are your priority, explore alternative options that offer flexibility without the insurance cost.
Out Of Obligation To Friends Or Family
It is not uncommon for friends or relatives who work in insurance to ask for help with meeting their sales targets. While it may be tempting to help, purchasing a policy without a genuine need is a mistake that many people regret. Insurance is a long-term commitment, and buying it for any reason other than your personal financial needs can lead to a lapse in policy payments or early termination, both of which result in financial loss.
Instead of helping others meet their goals, prioritize your own financial goals and consider other ways to support friends or family, such as referrals if they are genuinely qualified insurance agents. Insurance should always be a need-based decision.
Additional Situations To Avoid Buying Term Insurance
Aside from the above scenarios, there are a few additional points to keep in mind:
When Influenced By Others’ Choices: Avoid purchasing term insurance just because a friend or colleague recently bought a policy. Insurance is a personal decision, based on individual circumstances and financial needs.
When Using Insurance As A Substitute For Self-care: A term policy should not be seen as a reason to neglect health or lifestyle. No insurance policy can replace the value of good health, so staying healthy should always be a top priority.
When Expecting Returns From Term Insurance: Term insurance is a pure risk-cover product, and policies without a return of premium offer no financial return beyond protection. If financial returns are your goal, consider other investment options that align with your objectives.
Make Insurance Need-Based
While term insurance can be a powerful financial tool, it may not be necessary for everyone. If you fall into one of the above categories, forgoing term insurance can free up resources for other financial priorities. Financial security should be carefully tailored to your unique circumstances, balancing both current needs and future aspirations.
