Paying money for something which you won't get if you are alive!!! Doesn't it sound ridiculous?? Will you pay for any such thing!!! How can we do that?? Now read carefully, I being Gujarati and belonging to a typical bania family (community which is believed to be very conservative in spending) pay almost Rs. 30,000 per year for something which I will not receive benefit of if I am alive. For getting the benefit of what I pay I need to die. You read it correctly, so don’t bother to read it again. I am fully conscious at the moment.
Promise worth Paying for
I do pay Rs. 30,000 per year for the promise from somebody that in event of my unfortunate demise, all my financial liability, towards my family which I would have fulfilled, had I been alive, would be taken care of. Let me give you an idea about list of my financial liabilities, both current and future liabilities.
I have bought the flat by taking a loan from bank worth Rs. 48 Lacs. If I die today, my wife who is a home maker would require constant regular income till she is alive (another 45 to 50 years).
And let me tell you our current monthly requirement is around Rs. 22,000 to 25,000 per month and is doubling every 5 to 6 years due to the demon called "inflation".
I have a 5 year old son and 1 year old daughter, whom I want to give the best possible education which might cost more than Rs. 15 Lacs in current scenario and god knows how much it would actually cost me in future due to "inflation". Also wedding expenses when they attain the proper age, is there on the list of priority.
Apart from this also other unavoidable expenses are buying new car, holidays, replacement of outdated electronic gadgets etc. The list is longer but just to give you an idea, I mentioned some of the most important ones only.
Now by paying Rs. 30,000 to someone per year if I get a written promise that all these current and future liabilities would be taken care of, in event of my death, I think it’s a deal worth making. Is it a big cost, if i convert it in monthly figure it comes to Rs. 2,500 less than Rs. 100 per day.
By now some of you might have understood what I am writing about. I am talking about "Term Insurance".
All of you might be aware about the word Life Insurance, but I am sure many of you might have been wondering what this "Term Insurance" is, because you might have heard about money Back insurance, Endowment Insurance, Whole Life Insurance, Unit Linked Insurance but not term insurance. Let me explain. Now due to awareness because of print and social networking media Term Insurance have earned some popularity in the urban areas.
Origin of Insurance:
Before understating about "Term Insurance" let me take you in flashback, to the origin of Insurance. Concept of insurance took place from the basic need of sharing the loss of one unfortunate life by group of people.
For example, in a town if there are 2000 Families with one bread earner and every year 2 persons die according to past statistical data. So to protect the family of that unfortunate people, all 2000 families spare Rs. 10000 so totally Rs. 2 Crore is collected and it is divided between these 2 families who have witnessed the unfortunate event of demise of bread earner.
Isn't this system very simple, useful and very humane. The main concept of Insurance is nothing but to share risk of some people by the group of people. Term Insurance is the basic insurance which only provides the Risk cover in event of the person who is insured. These kinds of basic and most useful insurance policies, which are available from all insurance companies, but are still very less popular in India.
We, as a Human being, have always tried to add more and more features to the basic product through constant innovation; we also did the same thing with insurance. We combined saving, investment and tax saving benefit with the basic concept of insurance, which is not bad but as an outcome the basic benefit of insurance (pure risk) became very costly for people with limited income or people with many liabilities.
Why Term Insurance vs other insurance products
Just from the list my liabilities which I have already mentioned earlier, it seems that in case of my death my family would roughly need at least Rs. 2 Crore for securing all the current and future liabilities. Now to buy the policy, which provides me the Sum Assured (Amount payable in case of my death) worth Rs. 2 Crores, and also has the element of saving and investment I at least need to pay roughly Rs. 10 Lacs to insurance company every year. Buying the Traditional Insurance policy with saving element is very costly and one would hardly be able to afford it.
While term insurance being very cheap because it carries only risk premium, almost all can afford it. In my case by paying the premium of Rs. 30000/- on annual basis I have bought the risk cover of over 2 Crore plus.
On the other hand, it is always advisable to buy the term insurance and invest rest of surplus in mutual funds through SIP (Systematic Investment Plan) mode. For buying Rs. 2 Crore worth of Life insurance I have 2 choices - one is to buy traditional or ULIP life insurance policy by paying Rs. 10 lacs premium per year, other is to buy a term plan by paying Rs. 30,000 per year. Committing to pay Rs. 30,000 per year is far easier and convenient than to commit Rs. 10 Lacs premium per year.
In case of first choice, you would get your investment back with some profits, in case of second you won't get anything unless you die. But in second case, you have a freedom to invest remaining Rs. 9.7 Lacs according to your convenience and you can even diversify that amount among various asset classes and investment schemes available in market. In case of financial difficulty, there are chances that you might feel it difficult to write the cheque for Rs. 10 Lacs every year and that may result in discontinuation of insurance benefit. But it would be much easier to pay Rs. 30,000 even in a financial hardship compared to Rs. 10 Lacs.
Even in case of clubbing investment and risk cover, in majority of the cases it is observed that the basic cost of Risk cover is always higher in such policies than the cost of risk cover which you pay for buying "Term Plan".
First Step of Financial Planning
The first step of financial planning for your family is to protect your family from any kind of risk that can be an obstacle in creating wealth for all the required current and future financial liabilities. Death of bread earner could be the biggest such risk which can spoil all the current and future planning and make the life of one’s loved ones miserable. So it’s very essential for everyone to sit and calculate the need of protection required for the family in event of one’s unfortunate demise and then to buy a "Term Insurance".
Two Things to keep in mind while buying Term Insurance
- Be true to your Insurer: While buying a term insurance you need to provide all the relevant information truly which is asked by insurers. Because the premium which insurers decides is based on the various parameters which affects your life. In event of any misrepresentation of any information provided by you, it can create the biggest risk of rejection of claim. So provide all the information regarding your current and past health related problems to your insurers.
- Cost Effective: As Term plan being a plain vanilla product, it is advisable that you compare the premium charged by various insurance companies and select the one which is most cost effective. Also client should look for some added benefit if insurer is providing any, before selecting the insurer. For example, Kotak Life Insurance Co. Ltd. has one unique term plan called "Kotak Preferred Term Plan" where they differentiate the premium amount not only on the basis of Age or gender of a insured person, but also on the basis of weather the person is tobacco user or not. The one who is not tobacco user gets a huge discount in premium.
Currently, in order to cut their own costs many insurers nowadays have started promoting online term plans to avoid the distribution cost. But I strongly suggest one must buy the term plan with the help of some competent agent or distributor as the most important factor in case of term plan is a process of claim settlement. If you have some agent of distributor, your loved ones can call them for the assistance in case of your demise.
On lighter note, term insurance is the product worth paying for and praying that we never receive the benefit of the product during whole policy term.