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Articles March 16, 2020
We all buy life insurance policies as it is an integral part of providing a financial back up to our family in our absence. Most of us buy life insurance policy keeping in mind the uppermost sum insured or the maximum term without emphasizing the aspect of whether we need that amount of coverage and for those long years. Additionally, you may get attracted to a life insurance plan seeing the low premium without thinking whether the sum insured will be adequate to safeguard your family’s financial needs in sudden exigencies. Essentially, the calculation of your life insurance needs must begin with an analysis of your goals in life and consequently, you must then buy the best possible plan which can support you in getting the protection that you are looking for.
Let us talk about Term Plans – the most popular and traditional life insurance plan without any investment. When we talk about providing a financial shield to your family in your absence, a Term Plan plays a very vital role. A term plan is typically an insurance tool that offers complete financial protection using a sum assured to your near and dear ones if something unforeseen even occurs.
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The simpler method to compute the life insurance needs would be multiplying your present yearly income by 6-10 to derive the total amount of coverage needed. And this technique of calculation of the life cover is known as Human Life Value. This process fundamentally computes the current value of an individual’s life and future probable incomes in a way that your family is protected until that amount in the case of the unfortunate death of the policyholder. Therefore, assessing your need for life insurance tops the list.
There are 3 basic factors on which the choice between single or regular premiums are dependent on and they are your financial goals, your life insurance need, and affordability. Term plans are usually taken with limited payment or regular payment while ULIPs and the Endowment Plan with a single, limited or regular payment. A regular payment option implies that you as a policyholder need to pay the insurance premium every year for the entire term of the policy and is suitable for those who have an inflow of steady income. On the other hand, Limited payment offers the choice of paying for the first couple of years of the policy term and therefore is appropriate for those whose income fluctuates. And lastly, those who would like to pay at one go, for the single premium works out to be the most wanted option.
Term insurance is the utmost pure form of life insurance which is cost-effective and provides financial protection in case of death of the policyholder. In today’s times, term plans are very competitive concerning the all-inclusive cover until 80-85 years of age with ease of receiving the payments at regular intervals with critical illness coverages.
This is another critical factor in choosing any term life insurance plan. The length of the policy plays an important role here. Preferably, the life insurance cover must be up to the till you plan to work or earn as the breadwinner of the family and once you retire there would be nil income left. We will study this point with an example in detail in the next section.
You need to do a bit of research in finding out the Claim Settlement Ratio as this will help you in choosing an insurer who is trustworthy and reliable and settles a greater number of death claims. The higher the Claim Settlement Ratio is, the better will be the efficiency of the company is paying out the death claims.
Mr A Basu is a 40 years old professional. He is looking to increase his term insurance sum insured for his family, which consists of his wife and one son of 6 years old. His insurance agent suggested a life insurance term plan with a maximum tenure which is till 85 years of his age. Mr Basu thought about the other tenure also of 65-70 years, however, Mr, Basu is keen to go for a maximum possible term as he thinks that buying a life insurance plan at old age is going to be unnecessarily expensive and difficult as well. Now the question is was he right in his assumption? Is he right in his thinking? Will his family be benefitted in the long run? Will he is not accomplishing his financial objectives then like a son’s education, son’s marriage, buying a land or a house? Would he be required to support his family during that time?
The time frame of Mr Basu’s term plan mainly depends on at what time he views himself to achieve his main financial goals. If he can achieve the same in 15 years, he will be needing a term plan for 15 years only and not more. He must realize that with time, his family will be much less dependent on him monetarily. Further, taking a longer-term life insurance plan would imply a greater sum insured and therefore a higher amount of premium, which will not make sense in the long run.
Therefore, it may not be practical for him to take the maximum available term. He must focus on his planning for retirement as that benefit will be much more beneficial to everyone. He must ensure maximizing the amount that he pays towards creating a strong retirement reserve. And he must take the term plan for a duration till the time when his dependents will not be depending on him anymore and the term plan also expires at the same time. In this way, Mr Basu will be able to leverage all the factors and get the necessary coverage by paying premiums only for the term needed and not beyond that.
Choose the life insurance term plan wisely after considering the above factors to avail the maximum benefits for your family and stay stress-free.
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