At the heart of term insurance lies the fact that the family remains financially covered in case the insured meets an untimely death. However, with the abundance of choices, it has increasingly become a challenging task to select the right insurance plan for oneself.
Term insurance was initially introduced to provide financial support to the family members, upon the death of the insured, in return for an annual premium payment. However, over time many variants have emerged like Limited Pay Plans, Increasing Cover Plans, Staggered Payout Plans, Return of Premium Plans, etc. With an abundance of choices, it has increasingly become a challenging task to select the right insurance plan for oneself.
At the heart of term insurance lies the fact that the family remains financially covered in case the insured meets an untimely death. In selecting the right plan, one should always start by doing a need analysis and term insurance coverage required. Your term insurance coverage should broadly assess the financial resources your family will need if you were to meet an untimely death. An objective way of ascertaining this amount is by determining the Human Life Value.
The following needs to be included in your analysis :
- Determining your average monthly expenses is a good starting point.
- Also take note of your existing liabilities like home loans, personal loans, credit card bills, etc.
- Further take note of your liquid assets like the investment in Fixed Deposits, Equity, Mutual funds, etc.
- You should also include in your analysis the important financial goals that you foresee in the next 15 – 20 years of your life like child education, child marriage, home, etc.
- Finally, add the retirement corpus that you wish to leave for your spouse on retirement.
Thus the term life insurance cover one should have should be a sum total of :
Average monthly expenses multiple + Existing liabilities + Financial goals fund requirement + Retirement corpus – Liquid assets
What multiple of average monthly expenses should one include in the determination of Human Life Value depends on your current age. As a thumb rule, the following can be used in this regard:
|Age||Monthly expenses multiple|
|18-35 years||300 times|
|36-45 years||240 times|
|46-50 years||180 times|
|51-60 years||120 times|
Once you have determined the amount of cover, you should also know the tenure of term insurance cover that will be appropriate for you. You would want it neither to be too long (in which case the premium charged will be very high) nor too little (in which case your policy might lapse before you have met your financial obligations). A scientific way to do so is to determine by what age do you expect your liquid net worth net of your liabilities to be more than the cover requirement we have determined earlier. The age at which the two coincide should ideally be considered in choosing the term insurance cover.
Price is what you pay, value is what you get. Your objective should thus be to target the highest peace of mind per rupee of premium. The following may be relevant in selecting the company and term insurance plan. Policyholders often consider the stability of the insurance provider and reputation of the insurance company in the eyes of the policyholder other than the premiums comparable with competitors in the determination of the right company & policy. Term insurance represents a long term relationship between the policyholder and the insurance company. Hence, various emotional and psychological intangibles gain importance in selecting the best value proposition.
The claim settlement ratio also attracts a lot of attention as it reflects upon the effectiveness with which the insurance company has been able to settle the claims in the past. One should however be wary of the fact that it should be used as a filter rather than the key decision variable.
Term insurance covers also provide riders over the base policy which should be chosen wisely by the policyholder as per the personal requirements and circumstances. These include death due to accident cover (wherein some additional amount over and above the base policy amount is paid if one was to die in an accident), critical illness cover (wherein a lump sum amount is paid on the diagnosis of any of the listed critical illnesses), waiver of premium on disability (wherein future premiums are waived off if the policyholder is rendered permanently disabled) and waiver of premium on critical illness (wherein future premiums are waived off on diagnosis of any listed critical illnesses). From amongst these, the critical illness riders are the most expensive ones. One needs to achieve a balance between the extra cost to be paid and the additional benefits received.
Simplicity is one of the major reasons for the growing popularity of term insurance plans, as they are pure life covers. Also, term insurance is one of the most affordable forms of insurance. Further, the cover offered under the term insurance plan is much higher as compared to traditional or ULIP linked plans. This provides a strong financial buffer for the family of the deceased as compared to other plans. Thus, all that one needs to insure is that you keep paying the premium regularly and on time.