TERM INSURANCE is a pure risk cover product. It pays a benefit only if the policyholder dies during the period for which one is insured. Term Life Insurance provides for life insurance coverage for a specified term of years for a specified premium. The premium buys protection in the event of death and nothing else. Term Insurance premiums are typically low because it only covers the risk of death and there is no investment component in it. The policy does not accumulate cash value, It offers the cheapest form of life insurance. The premium can remain the same or increase. A policyholder insures his life for a specified term. If he dies before that specified term is over, his estate or named beneficiaries receive a payout. If he survives the term. there is no maturity benefit.
The Three Key factors to be considered in term insurance are:
1) SUM INSURED (Protection or Death Benefit)
2) PREMIUM TO BE PAID (Cost of the Insured)
3) LENGTH OF COVERAGE (term)
- TENURE OF TERM INSURANCE
Till what age should you buy a Term Plan? Should a 25 Year Old Buy a Term Plan Up to 80 Years?
The answer is NO! you should not buy term insurance for the longest term possible. You only need term insurance up to the age of your retirement because not many of the family members are going to be dependent upon you after your retirement. It makes sense for you to buy a big cover when you are young because of more financial responsibilities. But as our age grows, our assets also grow and we reach towards retirement we no longer remain the provider for the family.
- UNDERSTAND YOUR NEED FOR RIDERS
Most Common Riders which are offered with Term Insurance are
Accidental Death Rider
Permanent & Partial Disability
Waiver of Premium
Income Benefit Rider
Riders are a great addon to your term insurance but don’t get overexcited by them. Understand your need for them and add only if you require them. If you are frequently engaged in travelling you have more risk of dying in an accident so in such case you should add an Accidental Death Rider.
- AVOID BUYING RETURN OF PREMIUM POLICIES
Term Insurances are available in different options. Regular term insurance pays the sum assured in the event of death. Many Term Insurance policies are offered which returns you the premiums paid by you through the years at the end of the tenure of the policy.
This feature does comes at an added cost to the policy buyer. Such an added cost is what compensates the insurer for the repayment of the premium. Even though you get the premiums back, you do not get any returns on your money and since these plans are expensive, you have less left for investment purposes.
- AVOID BUYING SMALL INSURANCE COVERS
India is one of the least insured, and the average sum insured only range between 1-1.5 lakhs. This is mostly because most of the people do not have term insurance. Nowadays most preferred sum insured is 80 Lakhs to 1 Cr . Is it Enough? NO! The tenure of term insurance can be up to over 40-50 years. It might not be enough for your family 25 years in the future because of the increasing cost of living.
So, How do we calculate the amount of life insurance cover required?
ADD – All Your Liabilities
ADD – 3000 x Your Monthly Expenses
ADD – Any amount which can help your family reach your other financial goals