Asvita was in a state of shock after she got to know her best friend Ananya has lost her husband. Ananya, who is a homemaker, has a 3-year old son, and does not know how she will be able to sustain her livelihood. Asvita is wondering – what has she  done to protect her family in case of such an extreme situation.

If you can to relate to the hypothetical situation above and are seeking answers, TERM PLAN is the answer.

What is  TERM Plan/Term Life Insurance/Protection Plan/Term Insurance Policy?

Wikipedia defines Term life insurance or term assurance as “life insurance that provides coverage at a fixed rate of payments for a limited period, the relevant term”. After the period expires, coverage at the previous rate of premiums is no longer guaranteed and the client must either forgo coverage or potentially obtain further coverage with different payments or conditions.

 If the life insured dies during the term, the death benefit would be paid to the beneficiary. Term insurance is the least expensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis over a specific period.

For example, if an individual takes a term insurance policy at an age of 35 years for a term of 25 years, for the sum assured 10,00,000 INR. In case the policyholder dies within the term period the beneficiary would get the sum assured of 10,00,000 INR as a death benefit.

Do You Need a Term Plan?

 Take a simple quiz to know if you need a term plan for your family –

For each YES, give a +10 and No -10

  1. Are you the single bread earner in your family?
  2. Do you want your family to be financially fit even when you are not there?
  3. Do you want your family to be protected against any harsh circumstances like accident or death?
  4. Do you want your children to study still in good schools and earn a professional degree when you are not there?
  5. Do you sometimes think of how you would repay the debts and liabilities you own in case you meet with a severe accident and are unable to work?

What did you score? A ‘+’ indicate that YOU NEED a TERM Plan and a ‘-‘ You Do NOT NEED a TERM PLAN.

How much do you need?

Once you have decided whether you need a term plan or not, let’s dive into how much term plan an individual needs.

Experts advise that individuals should obtain  a sum assured ten times their annual income. It would mean that, in the case of an emergency your family would be insured for at least ten years.

However, there are many other factors that an individual need to consider before buying a term insurance like –

  • Numbers of dependants in your family?
  • Are you living a healthy lifestyle?
  • What kind of future education do you plan for your kid?
  • Would your spouse be working?
  • Are there any other additional sources of income?
  • How much premium could you pay from your income?

As a general practice, calculation for Sum Assured in a Term Insurance policy is –

Minimum Sum Assured = Annual Income x 10 times + Loans/Liabilities

And Term policy should be calculated as your retirement age – present age

Term Policy = Your Retirement Age – Your Present age

Annual Income Sum Assured @ 10 times Sum Assured @ 15 times
5 lakh 50  lakhs 75 lakhs
10 lakh 1 crore 1.50 crores
15 lakh 1.50 crores 2.25 crores
20 lakh 2 crores 3 crores
25 lakh 2.5 crores 3.75 crores
30 lakh 3 crores 4.50 crores
35 lakh 3.5 crores 5.25 crores
40 lakh 4 crores 6 crores

Should You Buy a Term Insurance when you are 40 years of age?

One of the misconceptions people have is that Insurance is not for them. You should note that with term insurance you are protecting your family and not yourself, so if you see yourself as –

  • The single bread earner in the family
  • Have debts and liabilities
  • Want your spouse [not earning] to be financially independent
  • you are still paying for your kid’s education

Then YES, it’s better to buy a term insurance for your family!

Should you buy a term insurance for a 5-year old?

Technically you cannot purchase a term insurance for a five-year-old kid because of the following reasons –

  • Your kid is not an earning member, and in the case of his death, your family would not suffer from a financial
  • Morally it is hazardous to sell insurance to children as they could be subjected to be harmed to claim insurance benefits

Points To Keep In Mind before Buying a Term Insurance

  • Pick the cover that offers the sum assured at least ten times your annual income + loans/liabilities
  • The term policy should be calculated as your retirement age – present age
  • Make sure to compare benefits and buy the products
  • Do not hide any information with your insurer
  • If you need a big cover try to break it into two. It offers the flexibility to discontinue one in the long run as your liabilities reduce.
  • Do not buy term insurance with return of premium- you would be paying a higher premium to get back premiums you have paid after 20 years without interest. This is a big financial mistake, becuase first, the value of premiums paid without interest after 20 years would be very low and second you are paying more to get back what you have paid!

We hope we have answered your queries on whether you should buy a term insurance or not. If you still have any unanswered questions or need help, feel free to contact us here.

We would be glad to help you with your planning and investment related decisions.

Samiksha Seth

Content Strategist – Dilzer Consultants Pvt Ltd.

Sources
http://www.myinsuranceclub.com/guides/how-much-sum-assured-cover-should-i-take-in-a-term-plan
http://www.livemint.com/Money/voNwGdBDP68IQPMb0uW0II/A-term-insurance-cover-should-be-10-time-annual-income.html
http://www.financialexpress.com/article/personal-finance/your-money-does-it-make-sense-to-buy-term-insurance-after-50/81876/
http://articles.economictimes.indiatimes.com/2011-05-04/news/29509218_1_term-insurance-life-insurance-policy