Notwithstanding how much has already been written about the importance and relevance of Term Insurance in the recent past, it is one product that has been unjustifiably and grossly underrated by the Indian customer. Trends in the last couple of years, however, indicate that customer are slowly but surely gaining a better understanding of this simple, cheap and effective tool to help secure their family’s future. If you haven’t yet considered this product, here’s why you must:
‘What’ is Term Insurance
- Term Insurance is the simplest form of insurance designed to provide a risk cover on the life of the insured for a defined number of years.
- There are no survival benefits associated with Term Insurance policies. In other words, the insured amount associated with a Term insurance policy is paid out to the nominees only in the event of policyholder’s death but nothing is payable to the policyholder if he survives the duration of the policy.
‘Why’ Term Insurance
- One of the key reasons why one should consider Term insurance is to provide financial support and a means to replace lost income for one’s dependents and family in the event of death, especially if you are the primary earner for the family.
- At the same time, it can also be used to ensure that your liabilities, if any, are met without imposing an additional financial burden on your dependents if and when you are not around.
- In addition to this you could use it as a tool to provide for financial needs related to key events and requirements of your loved ones like a Child’s marriage or education.
- While there can be no replacement for the loss of a loved one, with the right life insurance product you can atleast minimise the financial hardships and strife that your family may be exposed to.
- The lack of survival benefits should not be a deterrent in buying this product since the benefits and financial protection being secured for your family far outweigh the minimal cost of this protection.
‘When’ Term Insurance
- Term Insurance is a ‘must-have’ if you have a family that is financially dependent on you and if you are the primary source of income for your family. There’s never really a good time to die, but dying during one’s earning years is particularly burdensome to those who depend on us for income and support. Not having you around in such a scenario can impose a significant financial burden on your loved ones especially if you have outstanding liabilities as well such as Home Loans, Car Loans etc.
- It may not be as important a product to have if you are single with no financial dependents and limited or no liabilities.
- It is always better to start your coverage at an earlier age. With age, the associated risk to our life only increases, consequently making insurance more expensive with age.
- If securing your family’s financial future is a primary need, then you should actively consider a Term Insurance plan. If however, there is already adequate financial protection available for your dependents you may want to look at enhancing your long term savings and investments portfolio.
‘How’ much Term Insurance
- The amount that can be considered as an adequate insurance will differ for each individual but the guiding principles are pretty much the same for all. As discussed above, the key reasons for why one should consider Term Insurance are:
- to provide financial support and a means to replace lost income for your dependents and family in the event of your death, especially if you are the primary earner for the family.
- to ensure that your liabilities, if any, are met without imposing an additional financial burden on your dependents.
- to provide for key events and requirements of your loved ones like a Child’s marriage or education.
- The adequacy of your life insurance cover should be a derivation of which of the above needs are you trying to provide for and what are the associated amounts that will be appropriate for each such need.
- While some may recommend the use of ‘rules of thumb’ such as 10-15 times of your annual income being the insurance cover that you should consider, such rules may not be suitable under all circumstances and should be used with care. The best way to determine your insurance needs to determine the financial requirements of your dependents for each of the above mentioned needs.
- Needless to say, the risk cover that you need will be reduced to the extent of any savings / assets that you may already have to offset some of the liabilities you are trying to provide for.
Term vs. Term Return of Premium
- Term Return of Premium (TRoP) plans is a variant of Term Insurance that not only offer financial protection but also return your premium in case you survive the term of the policy. While this feature of ‘return of premiums’ may seem attractive, one should bear in mind that this makes the product more expensive than pure Term Insurance Plans (without any return of premium) and depending on the premium being charged may or may not really be beneficial.
- Take an example of a 35 year old male taking an insurance cover of Rs. 20,00,000 for a term of 20 years. Let us assume his premium for a Term Insurance plan is Rs. 6,000 and for a TRoP plan is Rs. 17,000 (an example that is fairly close to two such products available in the market today).
- In both cases, the risk cover on his life is the same i.e. Rs. 20,00,000 (the amount that would be paid to his dependents in the case of his death). However, if he buys the Term plan, he ends up paying Rs. 6,000 every year for 20 years with no survival benefits while in case of TRoP he pays a higher Rs. 17,000 every year but gets back Rs. 3,40,000 at the end of the 20 year period (17,000 times 20).
- Since there is an additional Rs. 11,000 (17,000 minus 6,000) that is being paid every year when choosing a TRoP, this choice can only make sense if one cannot deploy this additional amount elsewhere to earn more than Rs. 3,40,000 in 20 years. Rs. 11,000 invested at a minimal rate of 4.5% can fetch an amount greater than Rs. 3,40,000 in 20 years time.
- One needs to make sure that the opportunity loss on the extra premium under TRoP is not higher than what will come back as return of premium.
- When choosing between the two, consider various alternate investment options available for the extra amount you are paying for a TRoP. If these options give a return that is lower than what you would get through the ‘return of premiums’, do consider TRoP but if not, then Term Insurance plans should be the preferred option.
Term Insurance is a simple, transparent and cheap product to help you secure your family’s future and provide financial protection to your loved ones.
Anil Sahgal, Founder, i-save.com. Anil is an entrepreneur and experienced professional with over 20 years experience including in Insurance and Asset Management.