What is Term Life Insurance? One article to rule them all

Covid brought a great deal of uncertainty into our lives. Many families lost loved ones and some of those who were lost were the sole breadwinners of their families.

Many people believe financial products are complex and shy away or end up buying complex products with a lot of terms and conditions, only because they were sold to them by an agent who in turn profits from the sale of that product. One such set of products is life insurance. There are many endowment plans, ULIP’s(unit linked life insurance plans ) and their various types which are mis-sold to consumers under the pretext of rising NAV etc with their maturity value etc.

The best way to go for life insurance is to take up a simple term insurance. Life insurance is a way to protect your loved ones in case of your untimely death and a good way to take a life insurance is to not mix insurance and investment.

Term Life Insurance is the purest and simplest form of life insurance.Take as a risk mitigation plan. You pay a fixed premium for a fixed period of time to the insurance company so that if something untoward happens to you in that period , the company provides your beneficiaries with a predetermined sum – called the Sum Assured, so that your dependents are financially protected .

In case of the untimely death of the bread-winner of the family, the monetary loss caused is taken care of by sum received by the term insurance.

There are a lot of misconceptions in term life insurance where individuals feel that since I am not getting anything in return, investing in term life insurance is not valuable. We must only invest in term life insurance to manage the monetary loss caused by one’s untimely death.

We understand that now, we have made it clear what Term Insurance really is. We will discuss what one must take care of while buying a term life insurance.

Sum insured is the amount your loved ones will receive at the time of your death. This is not a one size fits all approach. This purely depends on various factors like your current age, inflation and current expenses.

A good rule of the thumb is to multiply your yearly income into 20. For example if your yearly income is 8l and you are below 30 and 1.6x would be a good amount to keep as your sum-assured. This will take care of inflation and 1.6cr put in an FD can provide a good return to meet expenses post taxes.
Again, this is not a one size fits all and is dependent on various factors.

Do remember the term insurance policies even though the sum insured is very high the premium tends to be lower and very affordable. Also, the best way to pay the premium would be on a monthly/regular basis hence the same doesn’t affect you much. For a policy of 2cr, the premium is 1500 per month for a 30 year max life insurance.

A lot of people get disappointed, that there is no ‘money-back guarantee’, endowment plans etc. and some feel their money goes to waste. Do remember that this is something that in case there is an untimely death the family gets a huge sum. Also, the insurance company when making your policy does an underwriting of your policy thus looks at the best value they receive from the policy. Also, lastly in terms of the time value of money-inflation does play an important role and the value of Rs.1500 that one pays over 30-40 years is very low.

Policyholders take the term insurance till the time they are 80-99 years. Thereby increases the overall premium paid. They forget that the term policy is only a replacement for the income the breadwinner would provide to his family. They also consider paying the insurance continuously after they retire – however forget that not only does their income through salary reduce but also their other costs in terms of medical expenses etc may increase.
A good rule of thumb, would be till 60 years (or whenever you retire for a salaried individual)

Again marketing ploy users fall for it – to pay the premium in a short period of time and get a 10%-30% discount. This decays the amount you have and the amount can be rather invested in some other instrument. Also in case you passway before the term is over, you still end up paying the entire sum which is a loss. Regular payment is the best and you can keep applying for the 80c benefit also on a regular basis.

Special Note
Very Important : Married Women’s Protection Act (MWPA): If you are a married man, and are taking life insurance with wife and children as beneficiary, enable this option while taking the policy. This ensures that no one else, including debtors, can claim any rights on your Sum Assured, upon your demise and your wife gets exclusive rights on the money. You can’t even pledge this policy. This has to be done at the time of taking the policy and cannot be taken on later on.

Riders
Avoid riders like accidental riders etc. There is the proverbial fine print – for example recently a particular individual was denied accidental life insurance because he was riding a 125 cc bike however in the accidental rider – the fine print mentioned that the insurance only applied for bikes of 100 cc. Riders are a way insurance companies make a few extra bucks. Always go for pure term life insurance. Keep your family informed: Provide the details and the insurance copy to your dependents and let them know the procedure to claim, else at least nominate someone to do so. If your children are too young, or your parents too old and they are your nominees, take the help of a trusted financial advisor to help them for you.

I hope this helped a little bit in understanding and buying a term insurance policy!!!