What is Term Insurance?

Imagine you have a financial safety net for your loved ones in case something unexpected happens to you. That's what term insurance is all about. It's like a promise you make with an insurance company: you pay them a small amount of money regularly (called premiums), and in return, they promise to give a much larger amount of money to your family if you pass away during the term of the policy.

Here's an example: Let's say you're 30 years old and you buy a term insurance policy with a coverage of ₹50 lakh for a term of 20 years. You pay a monthly premium of ₹600. Now, if, unfortunately, something happens to you during those 20 years, your family will receive ₹50 lakh from the insurance company. This money can help them pay bills, loans, education expenses, and maintain their quality of life even if you're not there.

Remember, term insurance doesn't offer any money back if you survive the term. It's designed to provide financial protection for your family in case of the unexpected. So, it's like having a safety net that ensures your loved ones are taken care of even if you're no longer around.

Choosing the Right Term Insurance Amount

Imagine you're choosing clothes that fit you perfectly. Just like that, picking the right coverage for your term insurance policy is about getting the right fit for your family's financial needs. The coverage amount, also known as the sum assured, is the amount of money the insurance company will pay to your family if you pass away during the policy term.

Here's how to figure out the ideal coverage amount: Consider the financial responsibilities you have. Think about your family's monthly expenses, any outstanding loans, education costs, and other needs they might have if you're not around. Your goal is to ensure that the insurance pay-out can replace your income and support your family's lifestyle even in your absence.

Imagine you have a family of four and your monthly expenses are around ₹40,000. That's ₹4,80,000 per year (₹40,000 x 12 months). Over a term of 20 years, your family would need ₹96,00,000 just to cover basic expenses (₹4,80,000 x 20 years).

Now, consider any outstanding loans or financial responsibilities. Let's say you have a home loan of ₹50,00,000. Add this to the basic expenses, and you have ₹1,46,00,000 (₹96,00,000 + ₹50,00,000).

Now, let's use the concept of Fixed Deposits (FDs) as a reference. FDs usually offer an interest rate of around 6% annually. If you want your family to have an income equivalent to what you provide, you'd need to generate a similar amount from an FD.

To calculate the annual income needed from an FD:

Annual Income = Total Amount / Number of Years

Annual Income = ₹1,46,00,000 / 20

Annual Income = ₹7,30,000

To earn ₹7.3 lakh per year using an FD with a 6% interest rate, we can calculate the total amount needed to generate this annual income. The formula to calculate the total amount based on annual income and interest rate is:

Total Amount = Annual Income / Interest Rate

Let's plug in the numbers:

Total Amount = ₹7,30,000 / 0.06

Total Amount = ₹1,21,66,667

So, to replace your income and fulfil financial responsibilities, your ideal term insurance coverage could be around ₹1.21 crore. This would generate an annual income of ₹7.3 lakh at a 6% interest rate through an FD-like scenario. This amount would help ensure that your family's financial needs and responsibilities are met in case of your unfortunate absence.

What's the Right Policy Length?

Choosing the right policy length for your term insurance is a crucial decision that depends on various factors. The policy length determines how long you'll be covered by the insurance, and it's essential to align it with your financial goals and responsibilities.

Think about your life stages and financial obligations. For example, if you're in your early 30s and have young children, you might want coverage until your children are financially independent and your mortgage is paid off. A policy length of 25 to 30 years could be suitable in this scenario.

On the other hand, if you're in your 50s and your children are already independent, you might opt for a shorter policy length that covers you until your retirement age. This could be around 15 years.

Remember, the goal of term insurance is to provide financial security to your loved ones if something happens to you during a specific period. You want the policy to cover your dependents when they are most financially vulnerable.

Consider factors like your age, financial responsibilities, children's education, and mortgage while deciding on the policy length. It's also a good idea to review and adjust your policy length as your circumstances change over time. The right policy length will provide the needed protection and peace of mind to your family.

Here's a simple formula to help you arrive at the right policy term:

Policy Term = Max (Retirement Age - Current Age, Years Until Child's Financial Independence, Years Until Loans Are Paid Off)

Let's use this formula for Rahul's scenario:

Step 1:

Rahul's desired retirement age: 60

Rahul's current age: 30

Number of years until retirement: 60 - 30 = 30 years

Step 2:

Number of years until financial independence of Rahul's child: 25 years

Step 3:

Rahul's home loan will be paid off in: 15 years

Step 4:

Calculate the maximum of the three values:

Policy Term = Max(30 years, 25 years, 15 years) = 30 years

So, for Rahul's situation, a policy term of 30 years would be a wise choice, ensuring his family's financial stability until his retirement, his child's financial independence, and even accounting for the loan repayment period.

Alternatively discuss with your advisor and break the term plans into parts with different lengths to get the maximum benefit with significant savings on premiums.

Why is a Life Stage Benefit Helpful?

Life Stage Benefit is like adding an extra layer of protection to your term insurance, making it even more tailored to your life's journey. Imagine your life as a series of stages, each with different needs and responsibilities. With a Life Stage Benefit, your insurance coverage can adapt and grow as you progress through these stages.

Here's how it works: Let's say you buy a term insurance policy when you're single and just starting your career. Your coverage might be sufficient at that time. But as you get married and have children, your financial responsibilities increase. With a Life Stage Benefit, you have the option to increase your coverage at significant milestones in your life, like marriage or the birth of a child.

For instance, consider Sneha, who got married and is planning to start a family soon. She has a term insurance policy with a Life Stage Benefit. When she informs her insurer about her marriage, they offer her the opportunity to increase her coverage to accommodate her spouse's financial well-being. Similarly, when she becomes a parent, she can further enhance her coverage to ensure her child's future needs are met even if something unexpected happens to her.

The Life Stage Benefit offers this flexibility without the hassle of purchasing a new policy. It's like upgrading your coverage to match your evolving responsibilities. This way, you can have peace of mind knowing that your loved ones are protected no matter which life stage you're in. It's like having a safety net that adjusts and grows with you!

What is Waiver of premiums?

Imagine this scenario: Life is going smoothly, and you have a term insurance policy in place to secure your family's future. But suddenly, an unexpected event occurs. You're diagnosed with a critical illness or meet with a serious accident that leaves you disabled. Your ability to work and earn an income is jeopardized, and the thought of keeping up with your insurance premiums becomes overwhelming.

This is where the concept of "Waiver of Premium" comes to your rescue. It's like a guardian angel for your policy during tough times. With this benefit, you won't have to worry about paying your premiums if you're unable to work due to a critical illness or disability. The insurance company steps in and continues to cover your policy even if you can't make the premium payments.

Let's take an example: Meet Rahul, a software engineer who met with an unfortunate accident that left him unable to work temporarily. He had a term insurance policy with a Waiver of Premium rider. Since he couldn't work and earn an income, he was concerned about his policy lapsing due to missed premium payments. However, because he had the Waiver of Premium benefit, the insurance company covered his premiums during his period of disability, ensuring his policy remained active.

It's important to note that the specifics of how the Waiver of Premium benefit works can vary based on your policy and the insurer. Some policies may include this benefit automatically, while others might offer it as an optional rider for an additional cost. Regardless of the details, the essence remains the same: Waiver of Premium provides you with a safety net that protects your policy when life throws unexpected challenges your way.

Accidental Death Benefit – Needed?

Imagine you're walking down the street, lost in your own thoughts, when suddenly you find yourself in an unexpected accident. It's a scenario none of us want to think about, but it's crucial to prepare for the unexpected. This is where the "Accidental Death Benefit" rider comes into play, like a guardian shield for your loved ones in case the unexpected occurs.

The Accidental Death Benefit rider is like an extra layer of protection added to your term insurance policy. It's designed to provide additional financial support to your family if you were to pass away due to an accident.

Meet Raj, a 35-year-old software engineer who values his family's financial security. He decides to get a term insurance policy with an Accidental Death Benefit rider.

Raj opts for a term policy with a coverage amount of ₹1 crore. Along with that, he adds the Accidental Death Benefit rider for an additional ₹50 lakh coverage. This means that if Raj were to pass away due to an accident, his family would receive a total payout of ₹1.5 crore – ₹1 crore from the base policy and an extra ₹50 lakh from the rider.

Now, let's say tragedy strikes, and Raj unfortunately meets with an accident that results in his untimely demise. Because he had the Accidental Death Benefit rider, his family receives the entire ₹1.5 crore payout, providing them with substantial financial support during a difficult time.

Remember, the Accidental Death Benefit rider can be a game-changer in scenarios like these, offering an extra cushion of financial protection to your loved ones. While we all hope for the best, preparing for the unexpected can make a world of difference for the ones we care about the most.

Return of Premium : Unravelled

Let's unravel the concept of Return of Premium (ROP) in term insurance – a feature that adds an interesting twist to your policy.

With a traditional term insurance plan, if you outlive the policy term, you don't receive any payout. It's like paying for car insurance and not having a claim – the premiums are gone. But with a Return of Premium (ROP) option, it's a different story.

Imagine you opt for a 20-year term insurance policy with a Return of Premium rider. During those 20 years, you diligently pay your premiums. If you survive the entire policy term, the insurance company gives you back all the premiums you've paid! It's like getting a refund for being healthy and reaching the end of the term.

Sounds great, right? But let's weigh the pros and cons of ROP:

Pros:

Money Back: If you live through the policy term, you get back the total amount of premiums paid. It's like a savings plan bundled with insurance.

Forced Savings: ROP can be seen as a disciplined way to save money over the years.

Cons:

Higher Premiums: ROP policies generally have higher premiums compared to traditional term insurance. You're essentially paying extra for the refund feature.

Opportunity Cost: The extra money you're paying as higher premiums could be invested elsewhere for potentially better returns.

Inflation: The money you get back might not be worth as much in the future due to inflation.

So, should you opt for ROP? It depends on your financial goals and priorities. If you value the peace of mind that comes with getting back your premiums, and you're willing to pay higher premiums for that, ROP might be appealing. But if you're looking for cost-effective coverage and are comfortable with the idea that term insurance doesn't typically offer refunds, a traditional term policy could be the way to go.

Ultimately, it's about aligning your insurance choices with your financial needs and preferences. Make sure to compare the costs, benefits, and potential returns before making a decision.

What’s a Critical Illness Benefit

Let's delve into the Critical Illness Benefit – a powerful addition to your term insurance policy that can provide you with much-needed financial support during challenging times.

Imagine you're leading a healthy life when suddenly you're diagnosed with a critical illness like cancer. This news not only impacts your health but also your finances. Medical treatments for critical illnesses can be expensive, and you might need to take time off work for recovery.

Here's where the Critical Illness Benefit comes into play. Let's say you have a term insurance policy with a coverage amount of ₹1 crore, and you've added the Critical Illness Benefit rider for ₹20 lakh. If you're diagnosed with a covered critical illness, such as cancer, you'll receive a lump sum payout of ₹20 lakh from the rider, irrespective of your medical expenses.

This amount can be a significant relief during a challenging phase, helping you cover medical bills, daily expenses, or even explore advanced treatments. Remember, the Critical Illness Benefit is not tied to your medical costs – it's a lump sum that can be used at your discretion to alleviate financial burdens caused by the illness.

While we all hope to stay healthy, having a safety net like the Critical Illness Benefit can offer peace of mind and financial security for you and your loved ones, giving you the flexibility to focus on recovery without worrying about the financial impact.

Conquering Inflation with a Growing Coverage: Is It Worth It?

In term Insurance you choose a specific sum – your total coverage – that the insurer commits to pay out if the unfortunate event occurs. In return, you diligently pay your premium each year until that moment arrives, or your payment period concludes. While this setup may seem straightforward, let's ponder the consequences of your decision 15 years down the line. A one crore coverage might be insufficient if the impact of inflation isn't factored in.

That’s why it’s best to choose a cover while taking into account inflation over the years.

However, what if you could sidestep these concerns when deciding on your coverage? Imagine if your coverage amount increased by 6% or 11% annually. This could spare you from a great deal of hassle. Yet, it's important to recognize that premiums for such plans would be notably higher than those for standard term insurance. Remember, there's no such thing as a free lunch. So, if you're contemplating a term policy with a progressively increasing coverage, bear in mind that your premiums will be 45% to 65% higher as well. Hence, it's prudent to factor in the impact of inflation in advance – a task we're here to assist you with.

Life takes us on a journey, and our financial needs change along the way. When you're young, your responsibilities may include a mortgage and supporting your family. But as time goes by, things evolve. Your kids grow up, your debts get paid off, and your financial situation improves.