WHAT IS TERM INSURANCE AND WHY YOU NEED ONE?

One of the most misunderstood financial products in India is “Term Insurance”. In fact insurance itself is not understood enough. Most people consider insurance as just another form of investments or tax saving instruments, which can earn them safe, stable returns over long run. The true and simplest meaning of insurance is – protection against risk. This risk may be life  or property or many other things. But in this article let’s focus on life insurance, and specifically term insurance.

WHAT IS TERM INSURANCE?

Term insurance is a type of life insurance policy which pays the Sum Assured as the death benefit only if the person insured dies during the plan future. For instance, if a person buys Rs.10 lacs policy for 15 years, his family is entitled to the money if he dies within that 15 year period, subject to his paying all due premiums in time. What if policyholder survives the 15 year period? Well, then he is not entitled to any payment.

WHY YOU SHOULD BUY TERM INSURANCE PLAN?

Last week one of my client asked me to advice if he really need to have a term plan as he already have 3 other policies for different purpose like children education, tax savings and retirement. The same dilemma is faced by many individuals who are not educated about the merits of the term plan. Since the term plan only pays death benefit, it is widely snubbed or skipped by many individuals. The logic behind their thought is that since no benefit is payable in the event of planned maturity, the premium paid under the term plan is not value for money. A simple question to be answered by many Financial Planner while suggesting the term plan is – Why should I pay for a product if I am not going to get any return?

So let me list 4 reason why you should buy Term Insurance Plan?

1.PROVIES A FINANCIAL SECURITY

Term Plans are solely designed to safeguard your family when you are not around to take care of them. It covers 100% Risk. As the years roll by, however, the insurance cover must be revised from time to time to meet the changing needs.

2.LOWEST PRIMIUM

The premiums of Term insurance plans are low as compared to other life insurance plans. This is because there is no investment element as all the funds go to covering the risk and providing protection. Term insurance plan provides a large cover at low premium ensuring that the nominee of the policyholder can live the same lifestyle in case of policyholder’s death.

3.FLEXIBILITY

Opting out of a term life policy is much easier than getting out of cash value policies. In term polices if you stop paying the premium the risk cover ceases and the policy ends. Nothing is payable to you as there is no element of savings in the policy. However, cash value policies only give the full promised survival benefit if they are held for the full tenure of the policy. If you stop paying premiums mid-term there is financial loss as you cannot recoup your savings portion of the policy without certain deductions.

Further many term life policy is much are “renewable” and “convertible”. The former ensures that you can go in for another term policy without a medical exam at the end of the first term policy. The latter allows you to convert your term policy into an endowment policy for the same sum assured with associated increase in premium.

4.RIDERS

Term Plans come with host of riders which provide extra benefits at nominal cost. Accidental death, permanent or partial disability, critical illness, waiver of premium are some of the options available. There is no set of rule as to who can avail a plan. It all depends on one’s need.

So there is no other financial product as important as a term insurance plan & that’s why Financial Planner suggest to buy a Term Insurance Plan

 

 

ARE YOU ADEQUATELY INSURED?

Everyone has a need for Life Insurance, because everyone is exposed to some or the other risk in life. Insurance enables the head or earning member of family to discharge the sense of responsibility that he or she feels for those dependent on them. By payment of small premium they create an immediate estate for their family and dependents. But one of the biggest problem is many consumers simply have no idea how much life insurance they need.

You need to know this, not only as an individual but as a customer too –particularly in view of fact that majority of Indians are still either uninsured or under insured. For instance, you might have several insurance policies, but are you also adequately covered?

Needs keep on changing through the life stages of an individual. Insurance need also changes during life. One should periodically review insurance needs in order to ensure that life insurance coverage adequately reflects the present life situation. For, while little life cover could result in the family not being financially self-sufficient in the event of the unfortunate death of the policyholder and chief wage earner, too much insurance would mean higher outgo of premiums at the cost of necessary life stage and lifestyle spent.

Figuring out your life insurance needs sounds trickier than it actually is. The important thing is first determine whether you need life insurance, which kind is best for you and carefully calculate how much you need.

First question: Do you need life insurance at all? If you have dependent and don’t have enough savings, you definitely need insurance.

Second question: Which kind of insurance should you get? If you’re main concern is to protect your family against loss of your income (Unfortunate death), term insurance is the way to go. It is cheapest insurance.

Finally, how much insurance do you need? The answer is really depends on how much money your family need will need after you are gone. There are many factors that are relevant in determining the amount of life cover you should buy. It takes a few steps, but it’s not rocket science. Let’s go through it:

  1. Income Replacement: –The objective of life insurance is to ensure that your family can live same lifestyle after you as they do now. In the event of your untimely death, the income earned from investment of the policy pay out should replace your current income. For e.g Mr. A aged is 25 years with current household expenses of Rs.30, 000 pm will retire at 58 years. Taking into consideration an average inflation rate of 7% , his projected expenses at retirement will be Rs.2,79,760.Thus the amount required at retirement will be Rs.4 Cr. Approx. (person lives for 12 years after retirement assuming no inflation.)
  2. Consider Liabilities/ Debt: The insurance cover should also include financial liabilities such as home loan, car loan and other personal loan. For example if your outstanding principal balance on home loan is Rs.20 lakhs and car loan of Rs. 3 Lakhs ,you need a minimum insurance cover of Rs. 23 lakhs plus a little extra for accrued interest.
  3. Future obligations: -You should also have enough coverage to pay for future financial obligations like children’s education, marriage etc. For e.g if you need Rs.5 lakh for child’s higher education & 10 lakhs for daughter’s marriage, you should include that when you are calculating how much cover you require.
  4. Tally up the resources: Now look at total of your savings or investments (e.g. FD, MF, PPF, EPF etc.) suppose you have 18 lakhs So carrying on the above example your

 

Total need = Income Replacement + Loans + Future Obligation – Invest.

                      =    4,00,00,000 +23,00,00,000 +15,00,000 – 18,00,000

                      =         4, 20, 00,000    (4.20 Cr)               

 

7 LONG TERM INVESTMENT OPTIONS

In previous article I have share short term investment options available in India. In this article I will share long term investments options available in India. Before that let’s see meaning of long term investments.

So what do you mean by Long Term Investments?

When an investment is done for a period of more than 5 or 6 years or even more than that, it is called long term investment. For e.g. saving money for child marriage, setting a retirement corpus that come under long term investment.

Most of, long term investments tend to give superior returns with passage of time. They are more tax efficient, as in case with certain mutual fund investments. Long term investment works only when it is untouched. However, you should always monitor your investment.

1. Invest in Stock/Shares: Shares tend to give better returns over the long term. As an investment options, investing in equity shares is considered to bring a high level of risk associated with it but if one can invest for a long term of more than 10 years, higher return is expected. Stocks can be opt as a part on the portfolio and percentage of allocation should based  on the risk capacity.

2.ELSS Mutual Funds: Mutual Fund investments are generally preferred by people who want to invest in equity and bonds with balance of risk & return. ELSS is a diversified equity mutual fund where the investors enjoy the dual benefits of capital appreciation as well as taxation benefit. In ELSS, the majority of funds are invested in equities. ELSS fund has 3 years lock in period from the date of investments i.e if you start SIP today, (July 2016) they can be redeemed in July 2019 only. This fund is best suited for investors who are willing to take risk and want to plan their long term investments.

 

3.Real Estate:-If you plan proper way, you can invest your savings in the real estate sector. But, you have to be very careful while choosing the right option since this involve huge investments. Moreover, one has to be patient enough to face impact of fluctuating prices in real estate sector. Your property might appreciate immediately or it might take many years for appreciation. Don’t be hurry to make investment in real estate. If required take help from experts.

 

4.Public Provident Fund: – Public Provident Fund is one of the best and secure long term investment option in India. It is among the few investments that not only offer you tax benefits under section 80C of the Income Tax Act, but also interest income is exempted from Tax. The current interest rate is 8.10% for F.Y.2016-17.Under this, the money will be locked for a period of 15 years & earn compound interest. A minimum yearly deposit of Rs. 500 required to open & maintain a PPF account & maximum deposit of Rs.1.5 lakh can be maintained in PPF account in financial year.

But less liquidity is a big negative for PPF. You can partially withdraw your investment  only at the end of 6th year. You can also take loan on balance of PPF account.

 

 

5.New Pension Scheme: – It is best retirement scheme for long term investment. NPS is regulated by PFRDA & hence considered a safe investment option. You can choose the percentage exposure you want to equity. All individuals between age group of 18 to 60 years can join NPS.

You get tax benefit for investment upto 50000 under section 80CCD in addition to Rs.1.5 lakh under section 80 C. The minimum annual contribution is Rs.6000 that can be paid in installment or lump sum.

There are restrictions on withdrawal before retirement and minimum 40%   of the corpus has to  be used to buy annuity. The main disadvantage of NPS is that 60% of corpus become taxable at maturity.

 

6.Post Office Saving Scheme: – Post office saving scheme are also called small saving scheme. It is preferred by individuals who want to earn fixed return with n risk. Being govt. saving scheme, it has very low risk. Post office offers various scheme such as National Saving Certificate, Monthly Income Plan, Recurring Deposit Scheme, Kisan Vikas Patra. Among them NSC is good post office investment option with guaranteed return amount.

 

7.Long Term Bonds: – Bonds is a form of lending money to government or company. In exchange government or company pays fix amount of interest on principal. If you don’t want to any risk or if you are not comfortable with direct equity shares or mutual fund investments, then investing in bonds could be a good options. There are many good bonds which actually provide a high return on investments. You may opt for Gov.10 year bond which is currently giving an interest rate of Rs.7.7%. One can also opt for inflation index bonds as the government set interest rate on bonds based on inflation.