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News & Views

Monday, Jan 11, 2016

Term insurance – because your family needs financial protection

   [Source : moneycontrol]
[Source: The Economic Times]

Term insurance enables you to secure your family’s future. It pays when you are not around and your loved ones can enjoy the same lifestyle they enjoyed when you were around.

Buying term insurance is considered as the first step in the process of building a financial plan. A financial plan could be built purely on savings or through a combination of savings and protection - “Save for life’s ‘certain’ needs and protect against life’s uncertainties”.

This can best be understood with an example. Let us begin with a scenario - I need Rs. 10 lakhs for my child’s education, after 10 years. Assuming that my investments earn 8% per year, I will need to set aside approximately Rs. 64,000 each year, for 10 years. This is a ‘certain’ need and can be achieved through regular savings.

Now let’s look at life’s uncertainties. Consider a situation - I am the sole breadwinner and my family requires Rs.1 crore to enjoy the same lifestyle in case I am not around. Arranging this one crore rupees may be a task for most individuals. Death is uncertain and none can be sure that he will get enough time to build a corpus, which will be sufficient to take care of the family, before his death.

But this mammoth task can be achieved if there is a collective effort. If 1000 individuals come together and contribute Rs.10,000 each, there is a corpus of Rs 1 crore in place in no time. This group can create a safety net for that one unfortunate person who dies before saving for his family. This arrangement – technically known as term insurance, works to provide a safety net.

It is the simplest form of life insurance. It is a cost effective route to buy financial protection. Simply put, I pay premiums and in return the life insurance company provides financial benefit to the nominee in case of my death.

Why should I buy term insurance?

I need term insurance to insulate my financial plan in my absence and enable my family to continue with their lives. Here are some of these situations wherein a term insurance can save the situation.

Leave a “home”, not a “home loan”

Take the case of a typical home loan borrower. I am 35 years old, married, have a child and have availed a home loan to purchase a property. If something happens to me, my family will have to repay the loan outstanding at the time of my death. If they can’t they will have to sell the house. This predicament can be avoided through term insurance. If I have bought term life insurance, the insurance company will pay my family a fixed sum. The family can use this money to pay off the home loan outstanding and continue their stay in the home.

Provide income for the family, even in your absence

At the age of 35, I have another 25 years of work life. If I am not there, my family needs to have an alternative source of income for those 25 years. The need for income replacement reduces as I near retirement. If I have bought term insurance, the family can invest the insurance proceeds received after my death, in various saving options and ensure that they get some regular income.

Broadly, individuals up to the age of 40 need insurance equivalent to 20-30 times their annual income. A person in the 40s will need protection that is 10-20 times the annual income and individuals in their 50s will need cover about 5-10 times the annual income.

Things to consider before buying Term insurance

How much life cover should I buy and for how long?

I need life cover to discharge my loans and to provide for the loss of future income to my family. Put simply I need to cover myself, as long as the loan(s) continue and of course, till my age of retirement.

I need to take into consideration my income and outstanding loans while purchasing a term plan. For e.g. I am 35 with a monthly income of Rs. 20,000 and have an outstanding home loan of Rs. 7,00,000. I will need life cover for the next 25 years. Therefore the calculation of cover will be: (Rs. 20,000 X 12 months X 25 years) + Rs.7,00,000 = Rs.67,00,000. I need this cover till retirement.

Whom should I buy it from?

It is necessary to select a life insurer with consistently high claims settlement records. Equally necessary is evaluation of the time taken by the company to settle claims. As “Justice delayed is often justice denied.”

If there is a cheaper product should I switch to a new policy?

As age progresses, buying insurance becomes more expensive. I should therefore continue with my existing policy.

What are my responsibilities while buying life insurance?

It is my duty to truthfully disclose all information in the application form. If I do not provide correct and truthful information, the company may decline my claim thereby defeating the objective of purchasing life insurance. I need to ensure that my latest contact details are updated to enable the company to send reminders and settle benefits in a timely manner.

What should I do if asked to undergo medical tests?

The company may want to ascertain my health condition before issuing the policy and hence ask me to undergo some medical tests. As they say, prevention is better than cure. Treat these medical tests as a preventive check-up that the insurance company is paying for.

What if the premium amount increases after the medical tests?

It is possible that medical tests throw up some prognosis requiring me to pay a higher premium amount. It would be unwise of me to decline the cover because of this. If I am at a higher risk, I have a greater need for the cover. The cover is worth it even with the additional premium.

In conclusion, buying term insurance today will ensure the well-being of my family, even in my absence.

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