Term Insurance is a must have for every breadwinner
You might have heard this advice many a times but often may not have taken it seriously. In this blog we will dive deep into the topic of term insurance, but before we get started let’s learn about the different types of life insurance. Life insurance can be broadly classified into 2 types and have various categories under them.
|PURE RISK ORIENTED||INVESTMENT + INSURANCE|
|Term Insurance||Endowment Plan|
|–||Money back Plan|
|–||Whole life Insurance|
The above are a few popular types of life insurances. The one thing that you may have noticed is that the term plan is the only differentiated item, many experts argue that the term insurance is the best type of life insurance that one can buy to protect his family. The discussion on the topic: Why mixing insurance with investments is not a good idea? should be left for some other day. Since you have understood the different types of life insurance policies we can now start with understanding term insurance and its various aspects.
WHAT IS TERM INSURANCE??
We will understand life insurance via an analogy. Mr Ram (35 years) is a salaried employee earning Rs 50,000/pm who lives a modest life with his family (wife & 2 kids) in Pune, being the breadwinner(sole earner) of the family he one day had a thought: “If I die the very next day who will take care of my families financial goals?” so he decided that he wanted to cover his family financially even if he died pre-maturely.
He called up his financial advisor Rohan to look out for an insurance policy which could do the same. Rohan explained to him that a term insurance would suit his needs perfectly in this case. He further went on to explain that a term insurance is a contract between the insurance company and the policyholder for a particular period, where the insurance company agrees to pay the policyholders nominee a lumpsum in the event of death of the latter in exchange for regular premium payments. Ram was very impressed by this policy and bought his term plan the very next day.
WHY SHOULD EVERY BREADWINNER HAVE TERM INSURANCE??
- FINANCIAL COVER TO THE FAMILY-
Term insurance ensures that the families financial goals are covered even in the absence of the breadwinner. In the absence of term insurance the family would face financial troubles and may even have to sacrifice some goals like child education, marriage and etc.
- CHEAPEST FORM OF LIFE INSURANCE-
Term insurance is “Pure Risk” insurance i.e. In case the policyholder survives the term, the nominee will not receive any money and because of this reason this is also the cheapest form of insurance. If one is of age 25 he can get a cover of Rs 1 crore at only Rs 7,000- Rs 10,000/pa. Unlike other insurances the premium amount here stays constant.
- TAX BENEFITS-
The term insurance apart from covering your family financially also provides you with a tax benefit on the premiums you pay. One can claim a deduction up to Rs 1.5 Lakhs under section 80C. The tax benefit provided by the government is a way of encouraging more and more people to buy term insurance.
- TERM INSURANCE IS A SIMPLE PRODUCT-
The term insurance plan is a simple product to understand to the common man unlike other types of life insurances which reduces the chances of mis-selling.
- RIDERS PROVIDED WITH THE PLAN-
Riders are additional benefits which can be purchased along with the term insurance plan by paying a little additional premium. I believe that there are a few must have riders like Accidental death rider, Accidental disability rider, waver of premiums rider & Terminal Illness rider.
HOW MUCH INSURANCE COVER SHALL I OPT FOR?
The thumb rule says that one should be covered for 7-10 times the annual salary of the person, however a minimum of 10 times the annual income should be taken as insurance cover. One will also find people who have taken a cover of 20 times their annual income. For Instance if your annual income is Rs 5 lakhs the minimum insurance cover that you should opt for should be Rs 50 lakhs and the maximum is Rs 1crore.
One common mistake what investors make is that they think buying a term insurance is a one time process, If there is any rise in your income then it should be matched with by buying an additional term plan. Let’s take the earlier example only when your income was Rs 5 lakhs you bought an insurance cover of Rs 50 lakhs and now you get promoted and your annual income is now Rs 7 lakhs then in this case you will have to buy an additional insurance cover of 20 lakhs so the total cover will be 70 lakhs (50+20).
THINGS TO KEEP IN MIND WHILE BUYING TERM PLAN
Since the term plan is more or less the same in all companies it is very important to compare the plan of different companies and choose the one with the lowest premium
A low premium may sound attractive on the face of it but it is important to conduct a basic research regarding the companies background and ask the following questions-
- What is the claim settlement ratio of the company? Ensure that it is more than 95%.
- How long has the insurance company been around? Only those companies should be chosen who have been around for a long time and have endured the test of time.
- Is the company financially strong? The company who is already having financial troubles should be best avoided.
While filing the term insurance form make sure that you disclose all material information and do not hide any facts which could lead to your nominee being denied the claim.
Term Insurance is something which you don’t want to leave to chance. Having a term insurance can be the difference between your nominees living a happy financial life or living broke. It is often said in the financial world that there are only two things certain: Death and Taxes. If you haven’t bought a term plan, what are you waiting for? Go ahead and buy it. Feel free to contact us in case of any queries. Our team at Mitra money can help you select the right term policy.