What Is Insurance:
India is a family-oriented nation, festivities, functions, gatherings; we see the whole family coming together to celebrate. Now the situation might be quite different with nuclear families rising in numbers, but altogether it’s safe to say that the essence has stayed true throughout. Family is everything. The bread earner for the family has to think about his/her parents, children, spouse, and or any immediate family. Now let us shift our gaze to the worst-case scenario that can happen, the untimely demise of the bread earner. Who will take care of your spouse or kids or your parents, and their basic financial needs? It’s hard to imagine them running from pole to post just to live by. But what if we tell you there is something that can ensure that you can take care of your family and their needs even if you are not present with them. Sounds better now does it? A Term Insurance can do just that for you and your family. Making sure that they can live comfortably with fewer worries.
Insurance is a basic surety that a person in possession of an insurance policy will be provided with financial help in case of any loss(as mentioned in the policy), and for that surety, they are expected to pay a premium to an Insurance company. In simpler words it’s a risk transfer tool, transferring the financial risk to the insurance house in case of the untimely demise of the policyholder.
If we talk about Life Insurance it sprouts from a popular Hindi saying: “Jaan hai toh, Jahaan hai”, translating to if you have your life you have everything. Among Life Insurance there is something called Term Life Insurance and it’s important to understand the subtle difference between both of them.
Life insurance would mean that the insured person is liable to get the payment of the insured amount on account of both the survival until policy tenure or premature death.
Whereas Term Life insurance is the kind of life insurance that gives a stated compensation to the remnants of the family of the deceased (person who was essentially insured). If the insured person outlives the policy tenure, he/she gets nothing. While Life insurance policies have higher premiums, the same for term life insurance plans is the lowest among all kinds of insurances.
While it is advisable to have both term and life insurance policies, it is essential to have a Term Plan in your portfolio as it has the main intention of providing a financial cushion to your family in case you are not present to provide for them and the sum assured is of a higher range thus making sure your family has a basic source to cater to all their living needs and liabilities settlement.
How does it work?
Even though it’s easy to not think about the death and possibilities of wrong things happening at the wrong times, it is essential for every individual to start thinking about their future family and to do everything to ensure that they don’t suffer at the wrong time, due to your absence.
Generally, a premium is to be deposited, to the Insurance house, at equal time intervals, (quarterly/monthly/annually) for the period mentioned in the policy, generally, Term Insurance policies are for a range starting from 10 to 30/45 years. The premium is low and affordable hence no unwanted pressure is put on the household finances.
How much to insure: To understand how much sum assured the family would require one should assess the current expenses and liabilities, add any future important expenditure or responsibilities to those, and then finally subtracting your disposable assets.
Let us undertake an example to better understand the framework to calculate the sum to be assured.
Mr. Ram has a family of 4, his parents, wife, and son. He is 30 years old and is a working professional. He has a monthly EMI of Rs. 30000 on a housing loan, Rs. 60 lacs of which is still pending. Let’s calculate the tentative sum to be assured
Step1: Assess the monthly expenditure of your family (Basic needs)
The basic monthly expenditure for Mr. Ram’s family comes to Rs. 60000, which will come to Rs. 7.2 lacs yearly.
Step 2: Assess the one-time expenses of your dependents
Setting off of liabilities worth Rs. 60 Lacs, For son’s education and marriage Rs. 50 lacs, implying the total one-time expenses come to Rs. 1.1 Cr
Step 3: Consider a Retirement Corpus for your spouse:
Mr. Ram wishes to leave a corpus of Rs. 75 Lacs. This is based on the calculation that after her son becomes independent, what amount would be required for her as a retirement corpus.
Assuming that by the time the son is 22 years of age, Mr. Ram’s wife is in her 50’s. Adding 30 more years till she is of the age of 80 and her yearly expenses come to Rs. 2.5 Lacs. Hence the total corpus required for her will be (2.5L*30) Rs. 75 Lacs.
Step 4: Assess your current assets:
Mr. Ram has a mutual fund portfolio worth Rs. 30 Lacs as well as he has a life insurance cover of Rs. 30 Lacs as well.
Step 5: Final Calculation
|Total Term Insurance Cover Mr. Ram needs|
|Monthly Expenditure||7.2 Lacs|
|One-time Expenses(Liab+Education+Marriage)||1.1 Cr|
|Retirement Corpus For Spouse||75 Lacs|
|Investments and Insurance||60 Lacs|
|Term Insurance Need||2.52 Cr Approx.|
There are many myths surrounding Term Life Insurance Plans that don’t necessarily hold true in practicality. Some of these common misconceptions are listed below:
1. Waste of money, I could have purchased a new TV and Fridge:
Due to its nature as a protective scheme, a Term Plan will not provide you any kinds of benefits if you outlive through the coverage of the scheme. But considering it as a waste of money is a grave mistake because no one knows what kinds of uncertainties might knock on our doors. Precaution is always better than cure hence it is prudent to get a Term Plan.
2. Cheaper Rates of Premium, is the best return to my investment:
Products at a cheaper side of the scale do attract us, but it’s not always a prudent choice while you choose your insurance plans. Always consider various other attributes such as claim settlement, track records, etc., before making a final judgment.
3. It’s A Lengthy Process, I’m Already So Busy:
Two Words: Smartphone, Internet. With services too taking a shift to online platforms, getting insurance has never been easier. You can easily look up policies available online, get a quote, compare with various policies in the same rank, and then make a choice. The premium payment for the selected policy can also be done through online mode. It will be a little difficult than Facebook scrolling and Twitter but worth the effort.
4. I Have Insurance, I don’t need a Term Plan:
Sure Life Insurance is necessary, but just having that isn’t sufficient. Meeting the day-to-day needs of your family will require a sum larger than the life insurance corpus. Ask yourself this will this amount be enough even for their sustenance? If your answer is no, then your next step is a term plan.
5. Insurance is an Investment:
People confuse Insurance as an Investment, thus expecting a return from the insurance policy. Or they put their money in the policy to save tax. This is a wrong understanding to develop, as the only fair purpose of the Term Plan is the protection of your family’s financial needs and wants after your demise.
6. ULIP’s investment is much better, at least I’ll get something in return:
ULIP’s is an insurance product whereby the premium you pay gets invested in different products (like Debt/Equity/or a balance of both). In case of the demise of the insured, the family gets higher than the fund value assured, he/she outlives the coverage, and they get back the assured value as per the policy. With high premiums, shorter span and plethora of processing fees charged on premium, it’s a fancy way to have a term plan but definitely isn’t necessary.
Term plans are the embodiment of “Sundar, Sasta, Tikau” sentiment that us Indians possess. Its for the long term future, premiums don’t hurt your pockets and you get a solid base for your finances, what more do we need?
Some Tips To Keep In Mind:
1. Include Term Plan in your financial goals. Necessary security removes unnecessary tension.
2. Don’t wait for a certain age to begin investing in term plans. Ideally one should start as early as they can to leverage the lower premium offered by the Insurance houses.
3. If you’re worried that you might outlive the coverage of the plan, one simple step is to take the plan offering the maximum coverage.
4. Do not forget to review your Term plan. As your income increases so should the sum assured. This is linked to the increased standard of living that may come with the pay rise making it comparatively easy for you to pay higher premiums, they are expected to increase between 4-8% after each year after your birthday.
5. Don’t expect returns from your insurance policy, its purpose is entirely different, expecting returns from a protective plan for your family is unwise on your part.
In the end, if the type of policies, coverage period or sum assured overwhelm you and affect your understanding of choosing a Term Plan rationally don’t shy away from taking financial advice from professional. Keep in mind this is a stepping stone for your family’s protection. And you shouldn’t let them down.
(Saarthi for your dreams)