Taking the present scenario into consideration, no one seems to be talking about returns in the last few days. I’m a part of lots of financial groups on Facebook. All I’d seen over the last few years was people talking about 1%-2% extra returns on their investments. Now, everyone is fearing for their life due to the widespread epidemic called corona virus, no one is talking about returns. The investments are down by 30%-40% and you cannot do anything about it. (Unless you had withdrawn from equity investments before the markets actually started falling). People are extremely scared about how their family would survive if something happens to them. Here comes the importance of term insurance and why it should be your very first step towards DIY financial planning.
Importance of Term Insurance
It’s very difficult to make people understand the importance of term insurance unless they’re willing to understand it themselves. Unless, they wholeheartedly love their families. Unless, they’re ready to accept the fact that if they die today, their family still has to survive financially.
You, me, or anyone for that matter cannot make people understand the concept of term insurance. It’s so because people give more importance to returns on Rs. 10,000 per annum. However, they don’t at all think about how their family would survive without them if they die today.
But think about this – Which investment will give you 1 Crore if you invest 10,000 today and die after 1 year? Yes, it is an investment. An investment not for you but for the safety of your family in the future. Moreover, it’s meant for your family to live peacefully with financial independence without relying on anyone else. Though it’s true that no one can fill the emotional gap but term insurance cover can definitely fill the financial gap.
And Yes, you can get term insurance of 1 Crore by merely paying a premium of 10,000 per annum. Please don’t ask me whether my money would go waste if I don’t die in the coming 20 years. Yes, your money will get wasted but you should be happy that at least you survived for 20 years.
Having said that, let us move further to the next point on how much should be the term insurance.
How Much Term Insurance?
How much term insurance should you have if you were to die today? Well, there are 2 ways to calculate it.
- Income replacement method
- Expense replacement method
*I’m personally in favor of the expense replacement method.
Income Replacement Method
It’s very easy to calculate the total term insurance amount with the income replacement method.
You just have to multiply your annual income by 15/20/25 and take a cover.
Suppose your annual income is 10 Lakhs, you can apply for 1.50 Crores/2 Crores/2.50 Crores. Most companies allow a maximum sum assured of 15/20/25 times your annual income. I would suggest you take a cover of maximum value.
Expense Replacement Method
For the expense replacement method, you can use the following procedure.
- First, calculate the monthly expenses
- Age of younger spouse
- Life expectancy (take minimum 85 years)
Let us calculate this with the help of an example:
- First, calculate the monthly expenses – Rs. 25,000
- Age of younger spouse – 28 years
- Life expectancy (take minimum 85 years) – 85 Years
Life Insurance cover = (Life Expectancy – age of younger spouse) * 12* monthly expenses =
(85-28)*12*25000 = Rs. 171,00,000 = Rs. 1.71 Crore
* 12 has been used to change years into months.
As you can see, this is the basic cover requirement. Now, add the outstanding loans and various goals amount to this value.
Suppose you’ve an outstanding loan of 25 Lakhs. And, you’ve chosen a goal amount of 25 Lakhs for your child`s education. Add this 50 Lakhs to the basic cover of 1.71 crores (as explained above).
So, the total term insurance cover requirement would come out to be 2.21 Crores.
Now subtract the assets from it (except your self-occupied house).
Suppose you’ve a PF, PPF, MF etc., of 21 Lakhs, subtract this amount of 21 Lakhs from 2.21 Crores.
Hence, the new cover requirement would be 2 Crores.
I’ve assumed returns over inflation as 0% i.e. if inflation is 6%, the returns would also be 6%.
You can use our term insurance calculator to check the requirement for the total sum assured.
Which Is The Best Company To Purchase Term Insurance?
If you’re looking for the best company to purchase term insurance thinking that it’d definitely settle the claim, you’re wrong. No company has a claim settlement ratio of 100% which means that claims are being rejected by almost every company. Be it a small company like edelweiss or a large giant like LIC, the situation is the same everywhere.
The only option left is to trust your research and instincts and purchase it from a company you deeply trust. If you go and ask people, everyone will have a different set of views and they’ll suggest different companies. In the end, it will only come back to you to make the final decision. Nevertheless, you can definitely ask a couple of experts you trust.
Moreover, there’re a few steps that you can take before deciding which company you should purchase from.
- Brand of the company
- Premium – Though most of the companies have more or less the same premium
- Claim settlement ratio – Though it hardly matters but you’ll definitely not purchase from a company with a claim settlement ratio of 80%
My personal suggestion is go for ICICI Pru Life/ HDFC Life/ Max Life/LIC.
Though there’re 100s of variations when it comes to online term plans, my suggestion is that you:
- Purchase it till age 60 – (Why not to purchase it till age 75/85/99)
- Don’t purchase any riders like personal accidental and critical illness riders with it.
- Don’t purchase term insurance with return of premium (Why you should avoid)
- Never purchase term insurance till age 85/90/100
My advice to all of you who’re reading this article at this point in time – Purchase term insurance now. If somehow recession kicks in and you lose your job, you wouldn’t be able to purchase one. The reason being that term insurance is given only to those people who’ve a regular source of income. No income simply means that you cannot purchase term insurance.
There’re some FAQs about term insurance which you can read by clicking on the link given below.
If you still have any doubts regarding importance of term insurance, please feel free to ask. I’d be more than happy to answer and help you out.