How To Buy Term Insurance ?
The only reasonable way of deciding what and how much insurance you
need is to unemotionally create a financial plan that your family should
follow if you die suddenly. The impact of such a
tragedy could be greater than just the sum of two deaths occurring
separately. Here are five things to consider.
Time left to retirement:
Before buying any term insurance plan, an individual must assess the
time left to retire and what 'sum assured' will be sufficient. Time
remaining to retire here does not necessarily mean retirement from your
job, but rather the time till your family members will depend on you for
their financial needs. Once you know the number of years for which you
have to stand as the financial support, look out for policies that offer
the matching policy term and maturity age. For instance if you are
supposed to retire after 20 years, make sure that you take a minimum
policy term of 20 years. It is important to be insured at least until
you pass on the baton to another family member.
Loans and debts:
As far as possible, take debtors'
insurance so that your debts can be paid off straight away. If you have a
housing loan, the lender has probably made sure that you already have
insurance for that loan. Other loans need to be considered. While you
can add these to your main term insurance, taking a policy where the
insurance company will directly pay off lenders has the advantage that
your survivors will not be tempted to carry the loans. Do not waste
money in insuring unsecured personal debt like credit card debt. The
card issuer cannot make your family pay so there's no need to cover
that, unlike say vehicle loans where you wouldn't want the family car to
be possessed by the lender.
Future expenses:
The
hardest part of providing for future expenses is estimating and allowing
for inflation. Take a reasonable, at least 7 per cent, inflation rate
into account.
Education:
Insurance companies are
making some attempts at designing policies that will ensure that your
children's education is paid for. What you ideally need is a policy that
is conceptually term insurance, that is which does not have any payout
if your children get educated during your lifetime. In other words, avoid endowment plans
Living expenses:
Estimate what your family's living expenses are going to be and
estimate the investment needed to yield that much return. Your term
insurance should be for this amount. Make a realistic financial plan.
Perhaps your spouse would need to start working if she doesn't now. Take
into account the investment needed if she were to start a small
business.
When it comes to 'how much sum assured' it is better to avoid thumb
rules, as the sum that would be adequate would differ for different
people. The best person to decide on the amount will be the one to be
insured. Sum assured should be purely based on current lifestyle, annual
family income, annual expenses, current investments (if any), and
liabilities like home loan or education loan overhead. The final value
after considering these figures will be the Life value of prospective
insured. Most insurance companies provide a 'Human Life Value'
calculator on their website to ease the task of calculations. Do not
forget to consider inflation, as the purchasing worth of Rs 100 today
will erode with time.
It is very important to figure out the apt
cover, because a higher cover would make you pay for protection that was
actually not required, while a lower 'sum assured' may not be able to
take care of the financial needs of your family in an adverse situation.
Most insurance products come with a minimum and/ or maximum sum assured
under their products. It is important to check if the sum assured on offer matches your requirement.
Sources:
Various publications
Disclaimer: The
information provided herein is based on publicly available information and
other sources believed to be reliable, but involve uncertainties that could
cause actual events to differ materially from those expressed or implied in
such statements. The document is given for general and information purpose and
is neither an investment advice nor an offer to sell nor a solicitation. While
due care has been exercised while preparing this document, we do not warrant
the completeness or accuracy of the information. We will not accept any
liability arising from the use of this material. The recipient of this material
should rely on their investigations and take their own professional advice.
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Nice article
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