What is Life Insurance?
What is Term life Insurance plan?, See, in simpler terms, insurance is a basic contract, where we pay an amount to the insurance provider in exchange for covering risk for a specific period, for example, if we have an insecurity or fear that whether if my car will get damage, or what if my shop caught in fire, or my crop got destroy, etc. Therefore we pay a sum of amount to the insurance provider in case if any disaster occurs than they will cover the financial risk.
Therefore insurance is a contract, where a possible financial loss is cover in exchange for a small fee.
Why we Ignore Term life Insurance?
Nowadays if you are riding a car without insurance it’s illegal but there is not compulsory to buy life insurance, where bikes and cars are replaceable but what about life?, can you replace it?, whereas car insurance is even more expensive than life insurance, present-day if want to buy insurance for a car worth of 10lakh, insurance plans would starts from 12,000 to 15000rs,
whereas if you want to buy an insurance for your priceless life, 1cr rs insurance starts just from 5000rs, which is far less than car insurance, but it’s not compulsory that’s why we ignore it.
In my view, there are two reasons we ignore life insurance, miselling and misconception, either we think it’s too expensive or we think that we don’t need it.
What is Term life insurance?
So in basic terms, Term life insurance is a contract, where a small fee, actually very small fee, promises that, if something bad happens to you between that term period of the term insurance plan, then the insurance provider will give a lump sum amount to your family for their survival. if you’re the bread earner of your family and something happens to you then the insurance provider will take care of the financial responsibility and will give a lump sum amount according to your plan.
How to choose term life insurance duration
The biggest challenge while choosing term insurance is to, choosing the perfect term life insurance for yourself and duration of term life insurance plan, it’s actually not that hard, insurance providers will try to sell you insurance for your child, wife, and other family members like your mother or father it’s their job to sell more and more insurances, but generally term-insurance should be taken for those who are the bread earners of the family like if your wife is also earning then you both should get a term insurance plan because your family is depend on both of you.
but the main question still remains for how much duration, well! it depends on you, for how long your family will be depending on you, like e.g if you’re now 29 years old, So, you will need to have a term plan until your child is earning money for the family, let’s stick with the example you’re 29 years old and your child is 5 years old, and you think that till 25-26 years old he’ll be earning money to complete family’s needs, therefore you would need to buy a term- insurance of 50-55 years of term plan. let’s say you have 2 kids one is 5 years old other one is 2 years old then you have to consider when your smallest child will be earning money for the family. According to that you have to choose your term plan.
Why you should not buy a whole life cover
If you’re looking to buy a whole life cover, Let’s say you’re buying 90-100 years of term plan, generally in India 70-75 life expectancy but if you brought a term plan for 90-100 years, first it’s premium will be much higher than normal term plan and actually you don’t even need this long period of insurance we previously discussed that the purpose of term-insurance is to provide financial stability, if something bad happens to bread earner of the family.
when you’re in your 60s and 70s, your child will be earning enough amount to complete the needs of your family, but if you still brought a whole cover of 1Cr it will have no value after 70-80 years due to inflation, rather if you would have invested that premiume amount in other assets you would have made more money.
How much insurance coverage do I need?
Another challenge while choosing term insurance is, how much insurance coverage I need ? well! it depends on lots of factors, You need to have insurance coverage to sustain your family’s lifestyle until they are financially independent, like you have to consider your kid’s education, expenses living in that city or town, loan if you have one, monthly expanses, if you have a rented home then you have to consider that as well, etc. Now, Let’s say your monthly expense is 50K so yearly it’s 6L. And while choosing the term life insurance you should not count luxury things in the term-insurance coverage like luxury vacations like international trips or luxury places, luxury goods, etc. In Insurance coverage should only consider the basic needs of your family.
Generally, the maximum life cover you could get, is 20x of your annual income, if someone earning 5L a year then he/she will get a 1cr life cover, life cover depends on your circumstances like whether your income is from business or salaried employee, what is you earning, etc.
Other factor while considering an Term life Insurance plan
So, as we discussed we need to have a term plan for the period until your family gets financially independent let’s go with the previous example if your family’s annual expense is 6L then you need to have a term plan that can provide 6L per annum to your family, means your FD should have at least 1cr, So, it can give an interest rate of 6% per year, generally in FD you can get 4-6% of interest it varies bank to bank, So, you need to account this as well, and also you need to consider that the expenses will rise as per the time, e.g you need to consider inflation, also FD’s interest can also fluctuate.
There are many retirement calculators to make the process easier, you can calculate there how much amount you’ll need when you retire and that amount of coverage you should consider buying.
The Truth behind Zero-cost term plan
In Zero-cost term plan, you will get a term plan and life insurance and also you will back of the permium amount which you had paid to the insurance provider. sounds great! isn’t it? But there is a catch, Let’s say you paid 5K per annum for 20 years which is equal to 1L, now In zero-cost term plans, the contract says that if you withdraw your term plan in between your forgo period (before maturity) then You’ll get the amount back which you paid to the Insurance provider.
Let’s say you’re in your 40s and took a plan for 70 years, which means 30 years of term insurance,
now assume your forgo period is 15 years means till you’re 55 years you can surrender the insurance. For 15 years you enjoyed the insurance and even got your money back, sounds great! isn’t it? but there are two major conditions, first you’ll get the amount after GST deduction so it’s not really zero-cost even you’re paying a higher premium in the name of zero-cost, and just imagine you’re paying someone 100rs for 15 years and you get no interest on the amount, In fact, the value will be decreased due to inflation even if you keep this in FD you will get 6% interest. If you only need a 15-year term plan rather then spending in higher premium in zero cost term plan, invest the rest money on other appreciating assets.
In Conclusion
But in the end, the choice is yours, this article is to only give you the information about how you will find a term insurance plan that suits you.