The family of Mr. Banerjee was left bereaved when he lost his life due to a sudden heart attack early in the morning. He was only 65 and the sole bread earner of the family and used to make his financial decisions himself. Though the emotional loss incurred to the family was insurmountable, the family was relieved when they found that Mr. Banerjee had made enough financial provision for the family to cope up with a situation like this.
Did you know how Mr. Banerjee managed that? Mr. Banerjee invested in a term insurance plan when he was working and this insurance plan came to his family’s rescue when he suddenly died that morning. The family made the claim to the insurance company who promptly paid the life cover amount to the nominee of the policy, Mrs. Banerjee.
As we can see from the above example, a dire financial crisis was averted due to the prudent decision taken by Mr. Banerjee which protected the family financially.
Sounds like a nice story, but did you grasp the crux? It was a term insurance plan which played the hero and saved the family from the financial crisis. Though the loss of an individual’s life cannot be compensated by any amount of money, the term insurance plan aptly compensated for the financial loss which otherwise would have accrued.
Does your story too have a term plan hero? If not, you must have one, else the ‘unawareness about term plan’ villain might write a tragic end to your story! But before that, let us understand what a term insurance plan is?
What is Term Plan?
A term insurance plan is pure protection insurance plan which is taken for a specified period. During the policy term period, if the life assured dies, the sum assured is paid to the nominee. The sum assured is the amount of life cover which is taken at the time of buying the policy. The benefit under the plan is payable only if the person insured dies. If the plan completes the stipulated term and the life assured is surviving then the plan matures and no benefit is paid.
Therefore, we can conclude that term plans are pure protection life insurance plans which provide coverage against the risk of death.
The common features of a Term Plan
There are some common features of the term plans as given below irrespective of the different variant that it might offer to the policy holders.
Nature of the plan - Term plans are traditional life insurance plans which are not linked to market returns and they provide only a fixed benefit, i.e. payment of sum assured in case of unfortunate death of the policy holder.
No bonus payment - Term plans are non-participating plans and do not pay any kind of bonuses or maturity benefits unlike other traditional plans like, endowment or money back plans.
Plan tenure - Since these plans are designed for life protection purposes only, the tenure offered under these plans are usually long. A maximum of 30 or 35 years can be opted as the coverage term under term plans or life coverage till age 70. Some Companies, however, offer coverage till age 75.
Death benefit - Normally, term plans pay a lump sum benefit equivalent to the life risk cover, in case of the life assured’s death. Some term plans, however, returns the premiums paid in case the life assured survives till end of the policy term.Some insurers have also launched plans wherein the death benefit is paid in monthly instalments post death of the life assured, to the nominee for a specified tenure. Thus these plans endeavour to provide regular income to the insured’s family which helps meeting day-to-day expenses.
Buying channels - Term plans though sold by all the sales channels like, Life Insurance agents, brokers and banks, it has become more popular as prospective buyers are buying the term plan online due to the low cost. You can visit the insurance company website and buy the term plan with a few clicks and pay the premium online.
The advantages of term plan
As you know, term plans are pure life protection plans and therefore it focuses only on the core of the insurance concept – What is the premium and what is the quantum of the life insurance cover.
High Sum Assured levels - The maximum amount of life coverage or sum assured that you can opt under a term plan is limitless. If you can pass through the policy underwriting norms of the company, you can avail very high levels of sum assured. Whether coverage you want, say Rs. 50 lakhs, Rs. 1 crore or Rs. 5 crore, a term plan would allow you this coverage subject to your financial underwriting.
Lowest premiums - The term plans are darling of the policy holders when it comes to choosing a high level of life coverage as the term plan premiums are the cheapest compared to any kind of life insurance policies. No other plan of life insurance can promise such high levels of coverage at such low rates of premiums.
To take or not to take a term plan
Despite the unmatched benefits of a term plan, the prospective term plan buyers face a dilemma while he or she considers investing in a term insurance plan. The dilemma is nothing but the thinking that what if I survive? I will not going to get any benefit out of paying the premiums for so long.
This, coupled with unawareness about life insurance in India, is the main reason why term plans are given a miss by many of us. What the prospective term plan buyers do not understand is that the benefits of term plans are not for the policy holder but for their family. How? Let us understand through the following.
The simple solution
While the lack of awareness about term plan benefits cannot be contested, term plans are very important in the context of the high coverage that it can provide at a low cost. As the plans charges low premiums for higher coverage levels, the common man can easily fulfil his family’s financial protection needs. Given today’s rate of inflation, the lifestyle expenses are rising progressively. In such a scenario, in the sudden absence of the sole earning member, a substantial corpus is required to meet such lifestyle expenses of the family. This substantial corpus cannot be self-built by a common middle-class man or woman and a term plan finds its application in these cases.
How much term plan life cover you should take
Though any life insurance plans provides invaluable financial security to your loved ones, the amount payable on your sudden death is dependent on how much life risk cover you have taken.
How to arrive at the life risk cover amount is very important. For example – While deciding your life risk cover, you may take into account only your annual household expenses. But what about your home and personal loans or any other liabilities (if any), the future goals of your child’s education and household expenses? Have you ever thought how your family is going to survive and achieve all of these in case of your unfortunate death?
That means if you account all of the above, then you need a big life insurance cover in order to fully protect your family financially. Some financial planners suggest that your life cover should be equal to an amount which, if invested in a safe instrument, can fetch a regular income to your family so in orderfor them to maintain the same lifestyle which they were used to when you were alive.
A basic method suggests that the life cover should be 10 to 12 times of your annual earnings in which you should also add the amount of liabilities. Let us understand this through an example -
Anil’s annual salary is 12 Lakhs and monthly expenses are around 80,000. He has taken a home loan of Rs 40 Lakhs and his son Raju needs Rs 20 Lakhs for meeting his higher education goal which is 10 years away from now.
Assuming Anil should have taken a life cover of 12 times his annual salary of Rs 12 Lakhs. It comes to Rs 1.44 Crores. Now, we need to account Raju’s higher education cost of Rs 20 Lakhs and the home loan of Rs 40 Lakhs. Therefore, Anil’s life risk cover should be Rs 2.04 Crores (Rs 1.44 Crores + Rs 20 Lakhs + Rs 40 Lakhs).
Assuming a situation, if something happens to Anil, his family would earn around Rs. 1 Lakhs per month by investing the life insurance amount of Rs 1.44 Crores in a safe instrument earning 8-8.25% interest per annum. The rest Rs 60 Lakhs will ensure that Raju completes his higher education and the family lives in the same house as they can repay the entire housing loan amount of Rs 40 Lakhs.
For those of you who are still unconvinced please go through the above example again and again and understand the importance of term plans.
So, now that you know the importance of the term plans, you should do a home work as to how much life coverage you need through a term plan. Needless to mention you can have it by paying a small premium compared to other life insurance plans. As we have seen in the above example, Term plans should be a quintessential part of your financial planning process and you should be wise enough to buy happiness for you and your family.
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