Source:- Advisor Khoj
Term insurance is the best form of life insurance.
It is a straightforward protection policy and the premium is much less than
life insurance cum savings products. With a term life insurance plan you can
get the optimal life cover and generate sufficient investible surplus to meet
your long term financial goals. Once you have decided on buying a term life
insurance, you should know that half the battle to provide financial security
to your family in the event of an untimely death is won. In this article we
will discuss how to select the best term plan. You should go about the process
of buying term insurance in a very methodical way and if you engage an
experienced certified financial planner your job will be that much easier.
There are 5 broad steps involved in buying the right term life insurance
policy.
1)
Determine the right amount of Sum Assured
You need to consider several
factors in deciding how much life insurance cover is adequate for you. The
insurance cover, also known as sum assured, should be adequate to cover the
following:-
·
How
much debt do you have: If
you are the only earning member of your family, your dependents may not be able
to meet the debt obligation in the event of an untimely death. Home loan, car
loan, credit cards and personal loans must be paid off in full. For example, if
the outstanding principal balance on your home loan is र 25 lacs and your car loan is र 5 lacs, you need a minimum insurance cover of र 30 lacs plus a little extra for accrued interest (not
paid). If your spouse is also working, you should determine how much loan can
he or she service, the balance must be paid off in full.
·
Income
needs of your family: This
is the biggest determinant of how much life cover you need. In the event of
death, the income earned from the investment of the policy pay-out (also known
as sum assured) should replace your current income. For example if your current
monthly expense is र 50,000 and assuming you
can get an annual pre-tax return of 7 - 8% on your investment, you will need an
insurance cover of र 80 – 90 lacs. You
should always add an additional amount, as a guard against inflation. As a
thumb rule you may add your annual salary as the additional inflation guard to
your sum assured. Your total sum assured, including inflation guard, in the
example above should be र 90 lacs - 1 crore. So
if you have loans of र 30 lacs and an expense
of र 50,000/month, total
insurance cover or sum assured should be र 1.3 crores.
·
Future
obligations: You
also need to factor in your future obligations, like children’s education,
marriage etc. For example, if you need र 10 lacs for your
child’s higher education on an inflation adjusted, you should include that when
you are calculating how much cover you require. If your child is 10 years old
and if you can get about 12% returns from suitable child investment plans, you
will need to make an investment of र 4 lacs. So, carrying on
the above example, you should add र 4 lacs to your required sum
assured.
You
can see the above method of calculating insurance cover factors, in how much
funds you will require immediately, how much funds you will require on an
ongoing basis and how much will you require at a future point of time, in the
event of an untimely death. Determining the right sum assured is a critical
aspect of life insurance. Being
under-insured is as worse or, at best, only marginally better than being
uninsured.
2) Determine the term of your
life insurance policy
The
term of your life insurance policy is as important as the sum assured. For
example, if you are 25 – 30 years old and have a 15 year term plan, you will be
left without life insurance by the age of 40 – 45. At that age health risks are
much higher, particularly with respect to coronary and cardio-vascular
diseases, than when you are younger. Buying new life insurance when you are
above 40 is much more expensive than when you are younger. For example, the
premium of a 15 year term plan for a 45 year old is more than double of 35 year
term plan for a 25 year old (based on LIC Amulya Jeevan premium rates). If you
take a longer term plan when you are young, you may be paying slightly higher
premiums in the initial policy years, but your overall savings in your life
insurance premiums over your entire working career will be much higher. You
should try to get the right life cover for the longest term possible. Of
course, there is the question of affordability. While you should not compromise
on the amount of life cover or sum assured to get a longer term plan, term
plans are advantageous in the sense that you can get a longer life insurance
term at a much lower cost, compared to other types of life insurance plans. 60
is normally considered to be the retirement age, but nowadays, more and more
people are working even beyond the age of 60. It is always a good practice to
assess your life insurance needs from time to time, and if you feel that you
will be working beyond the age of 60, it will be prudent to buy term plan to
cover you even beyond the age of 60.
3) Compare Plans before you buy
It
is always advisable that insurance buyers compare different term plans before
buying their life insurance policy, so that they can choose the right insurance
policy for their needs. While cost
is an important factor when buying an insurance policy, the claims settlement track record of the
life insurance company is also an equally important factor. For example, while
the premium of insurance plans of Life Insurance Corporation (LIC) is usually
higher than other companies, the claim settlement ratio of LIC is also higher
than other life insurance companies. There are a large number of term plans
available in the market. You should note that, under the current insurance
(IRDA) regulations an insurance agent are not allowed to sell products of
multiple insurance companies. While the regulations may change in future, as of
now, an insurance agent is not allowed to sell policies of more than one life
insurance companies. Therefore, an insurance agent will obviously be biased towards
the products of the company where he or she has the agency. A fee based
independent financial planner or insurance advisor can help an insurance buyer
buy the right policy. You can also buy term plans online after comparing
different term plans.
4) Choose
a company with good claims settlement track record
A cheaper policy is no good,
if the life insurance company for some reason or another cannot fulfil the
claim of the insured in the event of an untimely death. It defeats the very
purpose to buying life insurance. Even if the life insurer fulfils the claim, if
it takes a very long time to fulfil the claim it is certainly not a desirable
situation for family of the insured to be in.
5) Monitor
your life insurance needs on an ongoing basis
Some insurance buyers think that once they buy adequate cover in a good
life insurance plan from a reputed company, they assume that their life
insurance needs are taken care of forever. This is a mistake. Financial
situations of insurance buyers change with time. Compare your current income
with your income ten years back. Hasn’t your income grown several times?
Your lifestyle would also have improved significantly. If you bought a life
insurance plan ten years ago based on your income back then, the sum assured
will not be enough to meet your family’s current lifestyle and needs, in the
unfortunate event of your untimely death. Therefore
you should buy an additional term plan to cover that risk. Life Insurance needs
have to be re-evaluated at a regular frequency and any additional sum assured
if required, should be bought.
Conclusion
In this article we have
discussed 5 broad steps involved in selecting the best term life insurance policy that is most suitable for your needs. Life
insurance is one of the most critical aspects of our financial planning. It is
as important as investment planning in ensuring the financial well being of our
families. I have seen many investors devoting much more mind space to
investments compared to life insurance, while at the same time, spending much
more on life insurance than investments. If you follow the steps outlined in
this article and choose the right term plan for your life insurance, not only
will you be able to provide adequate financial security to your family, you
will also be able to free up substantial financial resources to invest towards
your other long term financial goals.
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