Term insurance is the simplest and most effective form of life insurance. It is a life insurance policy where you pay a small premium annually for a sum assured and for a period. The sum assured means the sum which the insurance company will pay in the event of the demise of the insured before the maturity of the policy. If the person survives the policy tenure, nothing will be paid.
Since the premiums are so small compared to the coverage provided, it is a sort of no brainer that almost everyone should have a term insurance plan.
The great advantage of this policy is that it offers protection against the sudden demise of the insured. The family is protected from a sudden financial crisis in such an event. This is the main reason why people invest in term policies. This is true even if only one premium has been paid. The entire sum assured is paid to the heirs or nominees. If an accidental rider is included, a sum equal to double (or even triple) the assured sum is paid.
Term insurance plans are of many kinds, and the applicant must make sure that the plan suits his financial means and his financial goals.
How much term insurance cover should I take?
People randomly purchase Rs 1 crore term cover these days as that is the most promoted and popular number that gets highlighted. Rs 1 crore is not a small amount. But it may not necessarily be enough.
I will explain it in a bit.
Try to answer this question – In your absence, what all needs to be taken care of?
Outstanding loans, goals like children’s higher education and their marriage, regular living expenses for your spouse and children (till they are dependent) and some funds for a medical buffer. That’s it.
So, list these down:
- Money required to close all outstanding loans
- Money for at least a basic house purchase (if not owned already)
- Money required for children’s education
- Money required for children’s marriage
- Money required for regular day-to-day expenses of your family for 15-25 years (increasing with inflation)
- Money as a buffer for your spouse’s old age requirements
- Money as a medical buffer for family
If you total the amounts in the above points and reduce your existing life coverage and existing investments from the calculated amount, you will get the additional life insurance cover that you need to purchase soon.
You can also use a simple term insurance calculator to arrive at this number. These free online calculators allow you to determine what is the right insurance coverage for you and the insurance premium you need to pay for the given sum assured. Once the calculator throws up the figure, you can then change the sum assured or the premium you can afford and see the best plan. If a sum assured has been determined by you, enter the sum assured and the other personal details along with the term. You will know the premium. Alternatively, input the premium you wish to pay along with the term and personal details and the calculator will tell you how much sum assured you would get.
But whatever you do, don’t just pick one random coverage amount and purchase a term plan for it. Think for a bit. If need be, at least use some thumb rules like taking a life cover of at least 15 times your current annual income. So, for example, if your annual income is Rs 10 lac, you can buy a cover of about Rs 1.5 crore. But it’s better to not go by thumb rules alone and instead calculate it correctly as explained earlier. Or use an online calculator.
How to decide the Right tenure of the Term Plan?
Under most circumstances, an insurance cover may not be required much beyond retirement. And that is simply because most of your financial goals will be over by then and you would also have accumulated enough money to take care of your dependents (mostly spouse). So, if you are 35, then you can take a cover of 25-years which covers you till you turn 60. But if you are 40, then even a 20-year term plan will be sufficient. The shorter the tenure, the lower the premium. But if you want to be conservative, you can opt for a slightly longer tenure than what is necessary and just stop paying the premium when the need for insurance is not there.
Including additional riders into a term insurance policy makes sense. For a small additional premium, there are several advantages. Consider the accident clause. This has 2 aspects. If an accidental demise occurs, the policyholder’s heirs get double the sum assured. This will mean that the family is not under any financial duress of any kind. In case of incapacitation, the insurance company makes a lump sum payout to take care of any needs.
There are several types of term plans. But in general, plain term insurance is the best option for most people. But if you must choose between return-of-premium plans vs traditional endowment plans, then go for the former.
Talking of coverage, let’s talk a bit about premiums.
Your annual term insurance premium depends on several factors, primarily the age of the applicant, income, and health habits like smoker or non-smoker. Since the premiums can be paid monthly, quarterly, half-yearly, and annually, the preferred payment that suits your finances influences the premium. The term for which you want to invest is also important. The longer the term, the smaller the annual premium.
Also, buying insurance may not be a one-time affair for everyone. Whenever you realize you are underinsured (due to increased responsibilities, new goals that require coverage, etc.), make an effort to increase your life cover via plain term insurance as soon as possible.
Related Reading – Insurance requirements change with age
And before I end the article, let me remind you that insurance should never be considered as a substitute for savings and investments. Even after buying the term insurance plan, you still need to save for your financial goals. So always invest for your goals properly guided by a proper financial plan. And if you have doubt, please take the help of a good investment advisor.