In India, the breadwinner’s
affiliation towards his family’s future is very strong with even the most
ambitious of professionals placing the family’s well-being and financial
security above everything else.
To someone who spends the
better part of his day working to provide comfort and luxuries to his family,
financial security might seem redundant as he is already providing for the
family’s finances.
The question that needs
answering is whether the family has the financial resources to maintain the current
standard of living if something happens to the breadwinner?
Not surprisingly, they aren’t
confident that their family members will have the same lifestyle tomorrow when
they are gone and the family’s finances dry up.
So
how does the individual plan for the family’s future in his absence?
Life insurance is a convenient
way to provide for the family’s financial security, especially if they are 100%
dependent on one person for finances. No matter how old the individual or
advanced in his career and profession, life insurance can help him and his
family, achieve financial security.
Protection plan which is known
as term plan is the primary way through which life insurance can provide for
the family in the breadwinner’s absence.
Term plan is the cheapest way
to insulate the family from a financial shock in case of an eventuality to the
family’s provider.
Term plan is the best form of
insurance because it gives a very high cover at a low price. The premium of a
term plan is a fraction of what you have to shell out when you buy an endowment
plan, a money-back policy or a Ulip with the same coverage. Of course, this is
also because there is no investment component in a term plan. The entire
premium goes in covering the risk.
One should know the fact that
the purpose of insurance to cover the only risk be it life, medical emergency
or any other type of risk. People often commit blunder and take endowment or
money back policy in place of pure protection plan i.e Term Plan. Term plan
does not have any substitute and mixing with investment plan is not
correct.
Before you buy a term plan,
here are a few things to consider.
How
much cover do you need?
Life insurance is meant to
provide the dependants of the policyholder with enough money to replace his
income in case he dies. Your life insurance must take care of the following
things: the basic expenditure that your family will incur, major expenses like
marriage of children and other liabilities like loans. If the life cover is
inadequate, it defeats the whole purpose of insurance.
Till
when do you need the cover?
The tenure of the term plan is
almost as important as the amount of cover. An insurance policy should cover a
person till the age he intends to work. Till a few years ago, this was 60
years. "However, a person may continue working beyond the age of 60.
Moreover, late marriages and having children at a higher age mean
responsibilities do not end at 60. I believe a person needs a life cover till
at least 65-70 years, though it may vary according to circumstances.
Don't take a short-term cover
of 15-20 years that ends when you are in your 40s. The premium will be very low
because you will be insuring yourself for the non-risky years. In the 40s, the
need for life cover is at its zenith. If you take fresh insurance at that age,
it will cost you a bomb. You might even be denied the cover if you have not
been keeping well.
Choose a term plan that offers
you the flexibility of fixing the tenure. Many online term plans come with
fixed tenures of 15, 20, 25 and 30 years. Others don't offer insurance beyond
60 years. So, a 32-year-old will not be eligible for a 30-year-plan and will
have to buy a 25-year cover, which will end when he is 57 years. It is best to
avoid such plans and opt for a policy that can be customised to your needs.
People configured the tenures
of term plans in a way that they match his financial goals. Whenever a goal is
achieved, the corresponding term plan terminates.
Have
you factored in inflation?
Have you bought a Rs 50 lakh
cover and think it is sufficient for you? Think again. The value of Rs 50 lakh
will only be Rs 28 lakh after 10 years assuming an inflation of just 6%. To get
around this problem, some insurance companies offer plans where the cover
increases by 5-10% every year or is indexed to inflation. "As your sum
assured would automatically increase in the coming years, it would take care of
the increase in your income as well as inflation.
Inflation is high right now
but may scale down in the coming months. The long-term average inflation in
India is expected to be 6-6.5%. "A 5% increase in the insured amount won't
match inflation. If you must go for such plans, opt for either a 10% annual
increase or an index-linked one. The opposite of an increasing cover is a plan
where the cover comes down. Such plans are meant to cover big-ticket credits
such as a house loan. The cover comes down as you repay the loan and eventually
ends. Here again, one should opt for a simple term plan than go for complex
offerings.
The return of premium plan,
for instance, is a sham that gives the buyer the total premiums paid at the end
of the plan, but the inflation-adjusted value of this sum is meagre. Paying a
higher premium for this benefit is not advisable. Likewise, the single premium
option is not a good idea because it frontloads the entire cost of the cover.
In case of early death, the premium for the rest of the term goes waste. In a
regular plan, the buyer gets the same insurance benefit by paying far less.
Over the last few years, term
insurance has been gaining huge amount of popularity. With the insurance
companies dropping the premium rates, they have also begun with enormous
advertising of these policies. Additionally, companies have come up with the
online options for obtaining these term policies. These prove to be very
appropriate for the buyers, while they compare and select their term plan. Why
term insurance is the best? Term insurance’ is the best and the most suitable
type of policy available, as it provides a high cover at lower costs. The
premium paid is just a portion of the amount you give to purchase a money-back
policy or unit-linked insurance policy with same coverage. The no-investment
component attached to the policy, and the premium involved to cover the risk
are some of the reasons behind the huge coverage of term policy.
Every earning member of the family should have the term plan as life is unpredictable. Term plan will take care of your loved ones' needs.
isclaimer: All information and data on this blog site is for informational purposes only. I make no representations as to accuracy, completeness, suitability, or validity, of any information. I will not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. All information is provided with no warranties, and confers no rights.
Because the information on this blog are based on my personal opinion and experience, it should not be considered professional financial/ investment advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. My thoughts and opinions will also change from time to time as I learn and accumulate more knowledge.
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