Term Insurance is a simple, cheap and effective life insurance.
Simple, because it comes with no investments or other add-on’s; and provides just the insurance or life cover that you are looking for
Cheap, since it is a pure insurance product, it only charges for the risk cover – no additional charges for fund management or premiums added to provide for savings.
There are no survival benefits associated with Term Insurance policies i.e. the sum assured is paid out only in the event of claim on death of the life insured. No payment is made on the maturity of the policy.
Effective, because it meets your needs for protection, enabling you to maximise the amount of risk cover you need for a much lower price compared to any other money-back or investment linked insurance product.
Therefore, term insurance is ideal if you require a product that provides for risk protection – whether to provide financial support to your family to replace lost income; or to repay liabilities (such as a home loan) in the event of death to protect from any financial burden.
Key points to consider:
As with most insurance, an early start is beneficial. If you require risk protection; or will do in the near future; the sooner you start, the better it is. Term insurance premiums are lower for younger people
‘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 Insurance is a simple, transparent and cheap product to help you secure your family’s future and provide financial protection to your loved ones.
Having heard so much about Term Insurance and why it’s so important to have one, you’ve decided to go ahead and insure yourself. But while doing some research on the products available in the market, you’ve come across this variant called Term with Return of Premium (TRoP) and it really appeals to you. After all, it provides you the best of both worlds – not only does it insure you and provides financial protection to your family in case you die but also promises to pay you back your premiums if you survive till the end of the policy term. No doubt, it seems like a win-win proposition but it may not always be true.
You need to make sure that you’ve considered the math behind the proposition. While the feature of ‘return of premiums’ may seem attractive, do 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 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).
Now the simple math:
Since there is an additional Rs. 11,000 (17,000 minus 6,000) that our friend is paying every year when choosing a TRoP, this choice can only make sense if he 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. Don’t know about our friend but most of us could safely park our money where it could earn more than 4.5% per annum.
That’s all there is to it, really. One just needs to make sure that the opportunity loss on the extra premium under TRoP is not higher than what will come back to you as return of premium.
Look at the extra amount you have to pay for a TRoP and consider various alternate investment options available for this money. If these options give you a return that is lower than what you would get through the ‘return of premiums’, do consider TRoP; if not- stick with the good old Term Insurance plans.