Our views of life and wealth keep changing with the times. The Maruti car that you bought in 2005 because it was so fashionable at that time will never be bought by you again in 2020.
On a similar vein, since all insurance products (and especially term insurance plans) have a term of 25 – 30 years, some thought should be given to whether the decision you take today will stand the test of time. After all, you don’t want to be seen driving a WagonR in the year 2040, do you?
You Can Own More than One Term Plan
The sum assured (death benefit amount) of your term plan is decided based on your human life value (HLV). As you can surmise, HLV factors in your annual salary at the time of buying a term plan. So, if you have bought a term plan at age 30, its sum assured is not going to be impressive 15 – 20 years later, when your salary has become much higher and inflation is also playing a role in making your old plan’s sum assured look insufficient to take care of your family in your absence.
This is why it might be a good idea to invest in another term plan at the age of 45 – 50 to ensure all your liabilities are covered and your family won’t have to compromise on their standard of living in case you are no longer around.
What Factors Should Decide Your Term Plan’s Sum Assured?
Here are the three most important things to consider when buying a term insurance plan:
- Is it covering your immediate loans and liabilities?
- Is it covering your children’s primary and higher education?
- Is it covering your household expenses like the monthly bill of groceries, maidservants, driver, petrol, and so on?
Your term plan’s sum assured needs to cover these expenses. If it is doing so, you can relax – you are adequately covered. It’s really that simple!
Your ideal sum assured is 15 – 20 times your annual salary if your salary is below Rs 10 lakhs/year. If it is above this, the ideal sum assured for you is 12 – 15 times your annual salary.
Your Plan’s Term Should End along with Your Liabilities
People tend to buy maximum-tenure term plans, which is an indication of incorrect financial planning. Term plans are simply compensating a basic requirement for your family in your absence – your monthly income. When you are actively earning (from age 25 to 65), your monthly income pays for your loans and liabilities and your children’s education and upbringing expenses. However, once you retire, these liabilities are no longer present and therefore there is no need to compensate for them either.
If you have a maximum-tenure term plan, you not only have to pay higher premiums but you also have to keep investing in an instrument that will give you no maturity benefits even after your income has stopped. This is an unnecessary burden.
Return-of-premium Term Plans
These plans, as the name suggests, return all the premiums you have paid over the years, back to you when you survive the entire term of the plan. These plans cost more but provide a feature that many would like to avail.
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