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

 

 

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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)