The Buyt Desk
Term insurance is an agreement between the insurance company and the policyholder. It plays an important role in a financial plan. A term cover provides monetary protection to the policy holder’s family in case of an untimely death. If theer is only one breadwinner of the family it is really important that he/she has a term insurance plan.
What is Term Insurance?
Term life insurance is also called pure life insurance. It is a life insurance plan that will give financial coverage to the beneficiary/nominee on the death of the person insured. This will take care of the family’s financial needs if the policyholder is no more. The term insurance premium is usually very less i.e a few hundred per month for 1 crore coverage. The premiums are based on the insured’s age, health, and life expectancy and even a medical exam may be required in some cases. The insurance company may also consider the driving record, smoking status, current medications, hobbies, occupation, and family history to determine the premium. You can also claim tax benefit on the premium of the term insurance under Section 80C of the Income Tax Act,1961. A tax benefit of up to Rs 1.5 lakh can be availed on the premium payment.
Why Term Insurance?
Term Insurance provides a good life cover of sufficient amount with a very affordable premium cost. One can go for term life policies that last 10, 15, or 20 years. And once the term expires and the policyholder is alive, he/she can terminate the term life insurance policy or renew it for one more term or convert it to permanent coverage. These policies do not feature any savings component but are purely guaranteed death benefits and this is how it is different from whole life insurance products. Also few insurance companies allow converting term life into whole life insurance.
If the policyholder dies within the policy term, the insurance company will pay the policy’s face value to the policy beneficiaries. The cash benefit the beneficiary gets is usually not taxable. This amount can be used to settle the insured person’s healthcare and funeral costs, mortgage or consumer debt if any and help the family to take care of their expenses. In case the policy expires before the policyholder’s death, there is no payout in term insurance. But one can renew a term policy at its expiration, although the premiums will be recalculated for age and health conditions of the insured person at the time of renewal.
How much Term Insurance cover do one need?
Term insurance protects the family against unforeseen death of the breadwinner by not disturbing and covering the future lifestyle or goals of the family. The cover must not be based on the present income but on the future assessment of the goals that one has decided for their family. The coverage amount should be adequate to meet the dependents’ present day to day expenses and future needs including kid’s college fees, carrier and marriage, medical expenses, spouse’s old-age needs and pending liabilities and loans.
The general thumb rule of the term insurance market says a person should buy a cover which is 10 times the current annual income. For example, if one’s current is Rs 5 lakh per annum then the chosen amount of Term insurance Cover should be around Rs 50 lakh. These are rudimentary computations which do not take into consideration the liabilities of the insured person, his/her existing investments and the needs of the family. Truly speaking, the financial circumstances of every individual are unique and a one size fits all approach may not give a precise result. A thorough analysis of insured person’s expenses, investments, liabilities and requirements is required to arrive at the ideal cover amount. Also there are insurance plans that offer an option to increase the sum assured to an X% year on year. Such plans keep policyholders sufficiently insured considering the current inflation rate. There are methods that financial experts have given which help one to calculate how much life cover one needs. Few such methods are human life value, income replacement value, expense replacement method and underwriter’s thumb rule method.
Summing up
Securing your loved ones against unforeseen emergencies gives you incomparable peacefulness. You can employ a term life insurance plan to take care of your family’s financial needs when you are no more. To make the best use of this financial product, get acquainted with the terms and conditions and have complete clarity on its working. Go through all the options available in the market and choose the best product for your beneficiaries. You can go for the one which is offering you the maximum benefits at the lowest premiums and satisfying all your requisites.
