We all need a financial plan in life to make our life secure and tension free. So the first step in this direction would be to buy a term insurance. A term insurance is your gift to your family for their safe future and your own mental peace. It is a way of ensuring that your family does not have to face any hardships and continue to maintain the same lifestyle in case of any eventuality.
It is a type of a life insurance policy which provides coverage for a specific number of years and incase the insured person dies during the time period specified in the policy, then the death benefit is paid to the family in the form of an assured sum. The benefits in a term insurance policy can be availed only in the event of the death of the insured within the specified coverage period.
Most of us build a financial plan purely on the basis of our savings for our needs. What we actually need to do is to build a financial plan on the basis of our savings for needs as well as our protection against life’s contingencies.
An example of savings for our needs would be- You need Rs. 10 lakhs for your daughter’s marriage after 10 years. If you assume that your investments will earn 8% per year, you will have to set aside Rs.64, 000 (approx) each year, for the next 10 years. So this need can be achieved through regular savings from your income.
Now for the example of financial plan for protection- Imagine that you are the only earning member of your family. In case of any eventuality your family would need Rs.1crore to maintain the existing lifestyle but you were unable to save that much money through your savings while you were alive with your sole income. So in this situation where will your family get this kind of money from? This can be achieved easily and in no time with the collective effort of say 1000 people contributing Rs. 10,000 each. This kind of safety net, technically called the term insurance is created by a group for the financial security of that unfortunate person who dies before being able to save enough for the sustenance of his family.
What’s the need to buy term insurance?
It is essential to buy a term insurance so as to enable your family to lead a life of dignity in your absence. It could come to their rescue in several situations such as
• Home loan- In case you have taken a home loan to purchase a property and something happens to you before you can repay it. In that case the entire burden of repaying the outstanding loan will fall on the family. If you have a term insurance, then the company pays a fixed amount to your family which the family can use to repay the home loan and live in the house without any fear.
• An assured income for your family when you are no longer there to look after them- Your family will get a fixed assured amount in case of any eventuality and they can invest that amount in various savings schemes, which will give them a regular source of income even in your absence, making life easier for them. Up to the age of 40years one needs insurance that is 20-30 times the individual’s annual income. In 40s the insurance can be 10-20 times and in 50s it can be 5-10 times the annual income.
The money from the term insurance policy
can take care of the post death liabilities of the individual, which in his absence will have to be taken care of by the family members.
Points to remember while buying term insurance
• How to decide the amount of the life cover- You need to cover yourself till your retirement to repay your loans and to ensure a secure future for your family in case of any loss of future income.
So for buying a term plan you need to keep in mind two points i.e. your income and your outstanding loans. For example if you are 30 years old with a monthly income of Rs.25000 and an outstanding loan of Rs.800000, then you need a life cover for the next 30 years. The total amount then for your life cover would be: (Rs.25000 x 12months x 30years) + Rs800000 = Rs 98,00,000.
• Where to buy the term insurance from? - There are a lot of companies in the market offering term insurance therefore you should carefully select a company which has had a long standing reputation for timely and consistent high claims settlement records.
• Is it wise to switch to a new policy if it is cheaper than the existing one? – No, you should continue with the existing policy, as the insurance becomes more expensive as age progresses.
• Your responsibilities while buying term insurance-
1. Provide correct information in the application form, failing which the company can decline your claim on a later date in case of any eventuality.
2. Ensure that the contact details are updated for the company to send reminders and settle benefits in a timely manner.
• Medical Checkup - To ensure your health condition before issuing you your term insurance policy, the company will want you to undergo certain compulsory medical tests. Your term insurance premium will be based on your medical condition. If the medical tests show up any prognosis, then you need the cover even more in the light of a greater risk to life, even at the cost of paying an additional premium.
The term insurance policy
does not give any interim benefits to the policy holder, is the simplest and the most cost effective insurance policy. This policy has set time duration and on its expiration the policy holder can decide whether he wants to renew the policy or let the coverage end.