Life insurance is defined to be an agreement between the policyholder and the insurance provider company. It is used as a safety instrument for the family. The most important type is term insurance.
In this unpredictable life, you don’t know what will happen in the next minutes. There are many families that become bankrupt once the family head is met with sudden death.
Why Do We Need a Term Insurance?
Life insurance is meant to be the protection that can be secured on the policy holder’s family.
Life insurance is only to cover the loss of income caused by sudden death. Life insurance is essential for someone (parents, spouse, and children) who depends on their income.
Life insurance will help those dependents not to suffer financially if he dies while earning.
Your family replaces the person physically, but insurance gives the option to replace the financial support they did when they were alive.
WHICH IS THE PERFECT INSURANCE TO BUY:
Although life insurance companies sell various types of policies such as Endowment, ULIP, Money Pack, Whole Life, real life insurance is the only term insurance. Only then can you get the “required amount” of insurance.
Term insurance is meant to be the insurance to cover your whole life. It has a particular tenure of coverage, which has to be completely paid.
If a policyholder completes all the premiums of the total tenure, they will not be getting any return. In some circumstances, if the policyholder met with a sudden death, the sum assured or coverage amount gets 100% credited in the name of the nominee
HOW MUCH THE INSURANCE COVERAGE SHOULD BE?
Although this varies from person to person, it is usually best to take out an insurance policy that covers 20 times your annual income. Take at least 10 times of the annual income.
Minimum choose 35 years of coverage tenure. If a person a term insurance at the age 25. Their family will be insured till 60 years of their age.
Nowadays, the coverage tenure is available even till the age of 85.
WHY TERM INSURANCE IS BEST FROM OTHER INSURANCE PLANS:
As I mentioned earlier, there are many insurance plans available in the market. Insurance agents sell more number of endowment and cashback policies. Because in these type of plans, the agents gets 30% direct commissions on the premium paid for the first three years.
Whereas in term insurance, the agent commission is very low and literally NIL. That’s is the reason, most agent don’t promote.
Let us have a quick recap of the benefits of term insurance over other insurance plans.
Endowment & Cash back plans: These plans are offered by all the insurance companies. In which the tenure will be 10, 15 or 20 years. The sum amount which you pay will be greater than the Sum assured.
For example, you take an LIC Jeevan Anand which is an endowment plan. In which you pay 12000 per month (including GST) to get sum assured of 2 lakhs after 20 years.
Actually, the amount which you pay is more than of your sum insured. The maturity amount will be lesser than sum insured. Upto maximum you will get 4 lakhs after 20 lakhs.
Please find the LIC Jeevan Anand maturity calculator.
The CAGR return of the policy will be just 2.59% return per year. The bank provides more than 3% return per year.
The lock in period of the policy is tenure duration. You can’t withdraw any amount within the tenure period. So, there is no liquidity.
The death benefit is, the insured nominee will bet 1.25 times of the sum assured or 1.05 times the total premium paid, when the policy holder met with sudden death.
Term Insurance: This insurance plan don’t have maturity, only coverage.
This insurance is to be treated as everyday expenses as it cover our family’s safety and security.
The sum assured is very high as like minimum 50 lakhs – 5 crores or more in some plans.
The monthly premium is very less as Rs. 580 per month, if the person takes below the age of 25. Only condition to get low premium is, the policyholder should not be a smoker or alcoholic.
Alcoholic and smoker also can purchase this insurance plan, but the premium amount will be higher.
Let us consider a person purchasing a term insurance at the age of 25 for monthly premium of Rs. 580 (including tax). The coverage is for 35 years. So, the amount the person will be paying is Rs. 2.43 lakhs.
The sum assured will be 1 Cr. So, if the same person met with sudden death, the nominee gets the sum assured of 1 Cr. If the person lives till 60, they won’t receive any sum assured.
When a person lives till age of 60, they might have settled their total family and will start to enjoy their retirement and this 1Cr will not be great amount to them, if they have done proper goal based investment.
If the policy holder met with a life threatening disease like cancer and if the consulting doctor submits a letter of the patient life expectancy will be just 180 days, the insurance company will settle the sum assured to the nominee while the policy holder is alive and counting their days.
Now, you should have understood how term insurance is the best among all insurance instruments available.
So, don’t get into the trap of ending up with endowment, cash back and ULIP policies.
THINGS TO CONSIDER WILL PURCHASING A TERM INSURANCE:
1. Purchasing insurance in a well reputed companies like Max, HDFC, ICICI, SBI, etc. These company try to settle the sum assure to maintain their reputation
2. Checking the last 5 years Claim Settlement Ratio (CSR). If the CSR is increasing year by year, then it is best to purchase.
3. Don’t take term insurance which provides the maturity amount back. These plans have high premium, more than 70% of the premium amount are used for endowment policies and they return as maturity amount. So, kindly avoid those plan.
4. Choose high sum assured of minimum 1 Cr. The best is choosing 20 time the current income.
5. Minimum tenure should be 35 years.
Like all the insurance plans, term insurance also subject to tax exemption under section 80C till 1.5 Lakhs paid in a year.
· Term is the only pure life insurance available.
· It is the only insurance which provides complete protection to your family
· Don’t fall in the trap of endowment, cashback and ULIP policies.
· Take minimum 1 crore sum assured and 35 years of coverage.