Term insurance is as close to a universal financial need as can be. With the exception of those who do not have any dependents, practically every adult has family members who will face financial hardship if he or she passes away. The only suitable way to guard against this is to buy term insurance. While most of us agree with this much, we end up making mistakes while deciding how much to insure for, and how to insure.
However, if you think logically it's quite easy to figure out the correct answers to these questions. Here's how to do it:
How to decide your insurance needs
Decide how much money your family will need if you die suddenly. Don't just guess or pull a number out of thin air, actually sit and do some posthumous financial planning. A good rule of thumb is ten years' income but there could be other factors influencing it. Some of these factors could be whether you own a house or other property; what kind of income your spouse or other family members have and how many children you have.
Let's look at this in detail. The only reasonable way of making this decision is to unemotionally create a financial plan that your family should follow if you die suddenly. Families also have to consider the impact of both parents passing away in an accident. The impact of such a tragedy could be greater than just the sum of two deaths occurring separately. Here are some heads to consider.
Time left to retirement: Before buying any term insurance plan, an individual must assess time left to retire and a sufficient sum assured. Time remaining to retire here does not necessarily mean retirement from your job, it means the time period till your family members will depend on you for their financial needs. Once you know the number of years for which you have to stand as the financial support, look out for policies that offer the matching policy term and maturity age. For instance if you are supposed to retire after 20 years, make sure that you take a minimum policy term of 20 years. It is fundamentally important to be insured at least till you pass on the baton to another family member.
Loans and debts: As far as possible, take debtors' insurance so that your debts can be paid off straightaway. If you have a housing loan, the lender has probably made sure that you already have such insurance for that loan. Other loans need to be considered. While you can add these to your main term insurance, taking a policy where the insurance company will directly pay off lenders has the advantage that your survivors will not be tempted to carry the loans. Do not waste money in insuring unsecured personal debt like that for credit card. The card issuer cannot make your family pay so there's no need to cover that, unlike say, vehicle loans where you wouldn't want the family car to be possessed by the lender.
Future Expenses
The hardest part of providing for future expenses is estimating and allowing for inflation. Take a reasonable, at least 7 per cent, inflation rate into account.
Education: Insurance companies are making some attempts at designing policies that will ensure that your children's education is paid for. What you ideally need is a policy that is conceptually term insurance, that is, which does not have any payout if your children get educated during your lifetime.
Living Expenses: Estimate what living expenses are going to be and estimate the investment needed to yield that much return. Your term insurance should be for this amount. Make a realistic financial plan and not an idealised one. Perhaps your spouse will need to start working if she doesn't do so now. Take into account the investment needed if she would start a small business.
When it comes to 'how much sum assured' it is better to avoid thumb rules, as the amount to be called an adequate sum would differ for each individual. The best person to decide on the amount will be the one to be insured. Sum assured should be purely based on current lifestyle, annual family income, annual expenses, current investments (if any) and liabilities like home loan or education loan overhead. The final value after considering these figures will be the Life value of prospective insured. Most insurance companies provide a 'Human Life Value' calculator on their website to ease the task of calculations. Do not forget to consider inflation as the purchasing worth of R100 today, will erode with time.
It is very important to find out an apt cover because, a higher one would make you pay for the protection that was actually not required and buying a lower sum assured may not be able to take care of financial needs of your family in adverse situation. Most insurance products come with a minimum and/ or maximum sum assured under their products. It is important to check if sum assured on offer matches your requirement.
This kind of unemotional, careful and realistic thinking is really the heart of making a sudden-death financial plan. Don't shy away from it. The fact is that Indians have a deep-set cultural antipathy against planning for their deaths. A minuscule number of Indians make a will. Even the country's most successful and richest entrepreneur, who organised everything else about his business so carefully (and whose death was not sudden), died without making a will and left his two sons to fight public battles for their inheritance.
Buying a term plan
Buy a low-cost term insurance for 25-50 per cent more than the above amount. To avoid putting all your eggs in one basket, split the term insurance across two companies. As time goes by, your income will increase and so will prices. Keep enhancing the insurance amount to reflect changing needs. At some point as your children start earning and become independent, the need could become static or even decline.
The best option today is to avoid agents and buy an online term insurance directly from the insurance company.
Apart from the sum assured, which you would have calculated based on the above process, there are a number of other points to keep in mind:
Tenure of policy: Since term insurance policies are for a pre-defined period, it is best to opt for the long term because it is difficult to get another policy at an advanced age. Besides, the premium on a new policy may be very high at that age. Therefore, buy a policy for as long as possible. Hopefully, by the time the term policy ends, you would have accumulated enough money for your retirement corpus to secure your dependants' needs.
Premium: Even when the sum assured and tenure are similar, the premium charged by different insurers could be different, often by a considerable margin. So do a comparison of premiums instead of buying from the first agent that approaches you.
Besides, study the various options available in the market properly. Some insurers charge lower premium rates from non-tobacco users. Rebates for higher sum assured are also offered. Always, the lower the insured's age at the time of starting the policy, lower is the premium.
The other aspects that you need to take into consideration while buying term insurance are:
Riders: Accidental death and disability, critical illness and waiver of premium are the three common riders that most insurers offer with their term plans. Buyers should evaluate (by looking at both the benefits and the cost) whether to avail of these covers via riders or via standalone policies. Waiver of premium is one rider that should be bought with all term policies. In case of others, you are better off buying a stand-alone policy.
Medical tests: Except when the sum assured is small, the buyer has to undergo medical tests when buying a term cover. As the age and the sum assured rise, and hence the insurer's risks increase, the tests get more exhaustive. Usually the insurance company bears the cost of these tests. Only if you buy a policy and then cancel it during the free-look period could you be required to pay for the tests.
Internet-based plans: You can purchase term insurance from a company's branch office, its agents, and increasingly, from its website. Almost all insurance companies nowadays offer Internet-based term plans whose premiums are much lower (than of a term cover bought via an agent or branch office). Since the cost of selling via the Internet is lower, companies pass on some of their savings to their customers.
Income-tax benefits: Term insurance offers income-tax benefits under Section 80C and 80D of the Income Tax Act, 1961. You may avail of deduction up to R1.5 lakh from your taxable income on premium paid. Additional deduction up to R25,000 is available on premium paid for (medical/illness-linked) riders. Moreover, the benefits received at death are also exempt from tax under Section 10 (10D). However, the Direct Tax Code proposes to tax the death benefit from term plans.
Post-purchase pointers
After purchasing a term policy, remember the following:
Pay your premium on time: If you miss the last date of payment, you will have to pay additional charges provided you have not crossed the grace period. If the latter date has also passed, the policy will lapse and reviving it is even more difficult.
Understand the policy: Make use of the 15-day free-look period (there is a 30-day free-look period for policies bought online) to read and fully understand the terms and conditions of the policy. This is your last chance to decide whether the policy fulfils your needs. If it doesn't, cancel it.
Finally, if protection for your dependants is what you are looking for, buy term insurance. Only with this low-cost insurance policy will you be able to purchase adequate protection for your family.
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