What's inside? 🧐
- Introduction
- What Is Term Insurance And How Does It Work?
- Who Should Buy Term Insurance?
- What Is The Policy Term In Term Insurance?
- What Are The Different Types Of Term Policies?
- How Much Term Life Insurance Coverage Do You Need?
- What Are The Advantages And Disadvantages Of Buying Term Insurance?
- Points To Remember While Understanding How Term Insurance Works?
Introduction
What will happen to my family if I’m suddenly no more?
This is a thought most of us have gone through - especially in the last couple of years, as the COVID-19 pandemic showed us how fragile life can be!
While the emotional turmoil and grief that death brings are not comparable to anything else, you must not discount another major impact your family will face if you were to pass away, especially if you were the main source of income.
The financial impact.
Losing a breadwinner can have serious consequences for the entire family. They might suddenly come face-to-face with the fact that there is a huge loan on the house they're living in, and now they’re required to pay it off. As they move on with their lives, they realize that there are everyday needs and monthly bills to be paid off - and without your income, they cannot do that.
Next comes the school fees, sudden healthcare expenses, and even the fact that there aren’t enough savings to fund your kids’ higher education.
This could mean that your family gives up on their dreams, loses their current lifestyle - and makes long-term compromises because there’s a shortage of cash. How do you ensure this doesn’t happen? Is there a way? Yes - we’re speaking about term insurance.
What is term life insurance? How does it work? What are the advantages of term insurance? What are the drawbacks?
Let's find out!
What Is Term Insurance And How Does It Work?
Term insurance is a type of life insurance that pays your family a sum of money (called the Sum Assured) in case your death happens within the term of the policy. All you need to do is purchase a suitable term insurance plan from any of the 15+ insurance companies in the market - and pay premiums regularly to keep the plan active.
Term insurance is the most elemental and affordable type of life insurance. It provides a replacement for your income and helps secure your family’s needs without compromising on their dreams and lifestyle, even if you're not around anymore. It is also highly customizable to fit your family's needs and preferences.
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Based on your family’s financial aptitude, you can choose whether they receive a single lump sum payout of this sum assured or receive a regular monthly income for several years. Based on whether you'll have a steady income in the future or not, you can choose to pay off the term insurance premiums quickly and enjoy the cover for a longer period. You can even choose to include a feature that will automatically increase the term insurance cover amount as time progresses - without you having to do anything. Basically, there are a lot of options that help you customize a perfect term insurance cover that fits all your family's current and future needs.
Who Should Buy Term Insurance?
Let's analyse a bit deeper who benefits the most from a term insurance policy -
✅If You Need To Fulfil Your Financial Responsibilities
Being the family breadwinner, you probably have many kinds of financial responsibilities, such as supporting your partner, paying for your child's education, funding a sibling's wedding, or contributing to your parent's medical expenses. These obligations might be burdensome, particularly in the face of unforeseen circumstances.
A term insurance policy provides an insurance cushion for your family in case of your untimely passing. The payout supports in making sure that these important obligations continue to be fulfilled, enabling your dear ones to carry on with their ambitions and lifestyle without suffering from financial hardship.
✅If You Have Dependents Who Rely On You
Financial dependents are members of your family who depend on you for their financial well-being, such as your spouse, children, younger siblings, or parents who have retired, etc. Their daily necessities, aspirations, and lifestyle rely on your income. If you pass away, their ability to maintain their financial security may be jeopardised if they don't have the right insurance. But, with the protection of a term insurance plan, they have the chance to live comfortably, maintain their standard of living, and follow their dreams.
It is important to remember that even if you've taken out a joint loan with an independently working family member, consider them as your financial dependents. They would be fully liable for repaying the loan in the event that something were to happen to you. In this case, term insurance intervenes in order to prevent the burden from falling completely on their shoulders.
✅If You Owe Any Money Or Are In Debt
Large financial obligations like business or home loans, etc., might put additional strain on your finances. Should you pass away, your family will be responsible for paying off the outstanding debt. Without a protective net, this might put a heavy financial burden on them. These outstanding loans are covered by a term insurance policy, preventing those you cherish from inheriting excessive debt and averting possible financial difficulties.
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✅If You Haven't Built Enough Wealth Yet
Although your ultimate goal may be to build enough wealth to ensure your family's financial security, things don't always go according to plan. Each person has different financial capacities, and it may take years to get to a place where your family would be completely supported in the event of your absence. Until you've accumulated sufficient wealth, a term insurance plan serves as a financial cushion for your family, giving them the stability they need in the event of an emergency. It promises that your family will have the financial support they require, no matter where you are in your wealth-building journey.
What Is The Policy Term In Term Insurance?
A policy term is also known as policy duration. It is the total number of years when your policy is active. To understand this concept better, let us take an example.
Say - you decide to buy a term insurance policy at the age of 30 years. Now, you need to choose for how long when the plan needs to be active. Let’s say you decide that you need the plan until you’re 65 years of age. By this time, you guesstimate that you will be done with most of your financial responsibilities, your children will be educated and with jobs, you will have paid off your major loans, and so on. So, you plan to end the term insurance policy by age 65. In this case, the policy term or the duration of your term insurance plan is 35 years (from age 30 years - to age 65 years). By paying all the premiums needed, you can keep your term insurance policy active for the next 35 years.
Now that we have understood the basics of how term insurance works, let us look into some of the benefits and advantages of buying term insurance.
What Are The Different Types Of Term Policies?
There are actually ten different kinds available at present. Let's analyse them -
👉Depending On The Premium Payment Term
Here are a few types that are categorised based on the premium payment term you choose -
1) Regular Pay Term Insurance Policy
You pay premiums on a regular basis for the entire duration of the policy that you select when you purchase a Regular Pay Term Insurance Plan. In simple terms, you're making payments from the beginning up until the policy's expiration.
2) Limited Pay Term Plan
For those who would rather pay their premiums sooner, a Limited Pay Term Plan may be a better option. With this choice, even if the coverage lasts for a longer time, you can finish all of the payments in fewer years.
3)Single Pay Term Insurance Policy
One option for people seeking to pay their premiums all at once is the Single Pay Term Insurance Policy. With this option, you are protected for the entire term of the policy after making a single, upfront premium payment at the time of purchase.
👉Depending On The Level Of Sum Assured Throughout The Policy Tenure
Depending on your choice of coverage, you have a few other options -
4) Level Term Plan
The sum assured in a level term plan doesn't change over the course of the policy; it neither increases nor decreases. Under this plan, you will receive exactly what you were promised from the beginning.
5) Increasing Term Insurance Policy
Are you looking for coverage that grows with time? With an increasing term insurance plan, you can make sure your coverage stays ahead of inflation and at par with your increasing financial commitments by allowing the sum assured to increase at periodic intervals and predetermined rates.
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6) Decreasing Term Plan
Conversely, a Decreasing Term Plan provides coverage that decreases over time at set periods. This usually continues until the sum assured approaches around 50% of the initial base coverage of the policy. This type is often chosen when the person has mortgages or loans wherein liabilities gradually reduce.
👉Other Types
To meet different needs, term insurance policies can be bought in several other specific types -
7) Whole Life Term Insurance Policy
You can get coverage from a whole life term insurance policy for your entire life, usually up to the age of 99 or 100. This option provides lifetime peace of mind and long-term security.
8) Joint Life Term Plan
The Joint Life Term Plan is a fantastic option if you want coverage for both you and your spouse under one policy. It makes things easier to manage by combining both people's protection under one compact policy.
9) Term Return Of Premium (TROP) Plan
You have more flexibility available under the Term Return of Premium or TROP plan. It comes with a maturity benefit. Your family will get the death benefit if you pass away within the policy's term. On the other hand, the insurer returns all of your paid premiums (taxes excluded) if you survive the term. Individuals seeking a balance between savings and protection find it a win-win situation.
10) Group Term Insurance Policy
Employers and organisations commonly employ the Group Term Insurance Policy to provide life insurance to their employees or members because it allows them to protect a significant number of individuals under a single roof.
To learn more about the objectives, benefits, drawbacks, and important considerations for each of these plans, check the following article on MyInsureBuddy: Types Of Term Insurance Plans In India.
How Much Term Life Insurance Coverage Do You Need?
Choosing the appropriate level of term life insurance is crucial to ensuring your dependents' financial security in the event of your untimely death. Term insurance bridges the difference between what you'll leave behind and what your family will require for them to continue on with their life and accomplish their objectives.
In just two easy steps, you can figure out the coverage you require -
👉Step 1: Determine Your Obligations
To begin with, figure out all the costs your family will incur in your absence. These fall into 3 primary categories-
- Living Expenses: Calculate how much your family will continue to spend on a daily basis. This covers everyday expenses like groceries, utilities, and medical bills. Add up all of your family's monthly and yearly expenses, then divide that sum by an anticipated interest rate.
- Big Dreams: Take into account lump sum expenses like your child's education, weddings, and any other significant milestones your family may wish to attain.
- Major Liabilities: Total all outstanding debts, home loans, personal loans, and vehicle loans.
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👉Step 2: Evaluate Your Assets
Next, estimate your current effective asset position after adjusting for risk and liquidity. To achieve this, apply risk factors to each asset class -
- Because they are immediately available, life insurance, savings, fixed deposits (FDs), and cash are all considered to have 100% value.
- Due to market volatility, equity investments should only be valued at 50% of their original value.
- Because they carry greater risk, assets like gold, real estate, and stock options should be valued at 0% in this computation.
The "effective amount" that you have is calculated by multiplying your assets by these risk factors. Add up these adjusted amounts to find out how much actual money your family owns.
Your term life insurance should fill the financial gap indicated by the difference between these two figures of what you own and owe. This difference is what's required to make sure your family has enough money in your absence.
Use a simple formula to determine your overall coverage -
Living Expenses Corpus + Big Dreams Fund + Major Liabilities Fund - Existing Funds.
What about Inflation, though?
Because inflation might gradually reduce the value of your coverage, it is vital to take it into perspective. To guarantee your coverage stays pace with rising prices, we highly recommend choosing the increasing cover option that’s offered by most leading term life insurance products. This feature helps you stay ahead of inflation by gradually increasing your coverage.
For A Customised Cover, Use MyInsureBuddy TruMatch
Use tools like MyInsureBuddy TruMatch, a term insurance cover calculator that offers a customised solution, to simplify this procedure. The MyInsureBuddy TruMatch calculator asks you a few straightforward questions about your family's objectives, long-term ambitions, and financial situation. Based on your answers, the calculator determines the minimum amount of coverage that will best meet your family's needs. It makes figuring out the ideal cover amount effortless.
What Are The Advantages And Disadvantages Of Buying Term Insurance?
Some of the benefits of buying a term insurance policy are as follows.
- Term insurance is a very simple and straightforward product. It is the easiest way for you to protect your family’s financial needs after you pass away.
- Term Insurance policies are very cost-effective. You could get a 1000x cover for the yearly premiums you pay, which is a way higher payoff than any other insurance product in the market.
- In most term policies, you get the option of customizing your term insurance plans based on your family’s needs, using features like increasing covers, limited payment options, claim payout options, etc.
- Most term insurance plans also offer you additional benefits called Riders that provide you with some extra benefits and help you get an additional cover for certain situations. Some popular riders include the Critical Illness Rider, Accidental Death Benefit Rider, Accidental Disability Benefit Rider, and Waiver of Premium Rider.
And speaking of disadvantages, term insurance has just one - there is no payback if you survive the term. If you outlive your term insurance policy duration, you do not receive anything back.
A point to remember (although not an outright disadvantage) is that the insurer won’t pay the claim amount if you pass away because of suicide during the first year of policy purchase. In this case, all the premiums you've paid during the year will be given back to your nominee.
Points To Remember While Understanding How Term Insurance Works?
Here are a few important things to consider when understanding how term insurance works -
▶️Term Insurance's Objective
Protecting your dependents' financial future or paying off any significant debts or obligations you may have are among the primary motives for buying term insurance. "Do I have dependents at present, or do I anticipate having them in the future?" Do I owe someone any money or have any unpaid loans? " If the response is in the affirmative, getting a term insurance coverage is a wise and essential move. It's important to act sooner rather than later because the younger you are, the cheaper the premiums for term insurance will be.
▶️Selecting The Optimal Amount
If you’ve decided that term insurance is essential for ensuring your family’s financial security, the next step is to make sure you select the appropriate sum assured. This guarantees that in your absence, your dear ones won't be left without enough financial support. Use a term insurance cover calculator like MyInsureBuddy TruMatch, which offers a tailored term insurance cover amount based on your particular financial circumstances and future aspirations, to get a clear understanding of how much coverage you need.
▶️Term Insurance Is a Long-Term Commitment
Long-term policy premium payments need a commitment, which is another crucial factor to take into consideration. All of the benefits of the plan will be lost if you miss even one premium payment, resulting in a policy lapse. Thus, make sure you can regularly pay the premiums over time and are completely prepared for the long-term nature of this investment before buying a term insurance plan.
▶️Selecting The Suitable Policy Term
When choosing the duration of your term insurance, take into account your current income, savings, anticipated future expenses, and projected retirement age - essentially, when you plan to meet your financial responsibilities and build enough wealth. Ideally, you want to get coverage that extends to this retirement age plus an extra five years to account for unforeseen circumstances.
▶️Assessing Payment Options
After that, you can choose how you want to pay for your premiums. You can opt for the Regular Pay option to make regular payments throughout the policy term or choose a Limited Pay option, where you complete payments in a shorter span - for example, five, ten, or fifteen years.
You can also choose whether these payments will be made annually, half-yearly, quarterly, or monthly. Setting up auto-debit or standing orders can help maintain the validity and efficacy of your policy by ensuring you never forget a payment.
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▶️Tailoring Claim Payments
You can then think of how you would wish your beneficiaries to be compensated in the event of your untimely passing. You can choose between a lump sum, a monthly income payout, or a combination of both. While monthly payments might assist in managing recurrent expenses, a lump sum payout is ideal for addressing major debts. A combined approach provides both immediate funds and ongoing support, offering flexibility based on your beneficiaries' needs.
▶️Adding Additional Protection
Riders are supplemental add-ons to your basic term plan that offer more comprehensive coverage in particular circumstances. For example, if you are permanently disabled in an accident, you will not be required to pay future premiums if you have a waiver of premium rider due to accidental disability. Other popular riders are Waiver of Premium due to Critical Illness or Accidental Disability, Accidental Disability, Accidental Death Benefit, and Critical Illness riders. Before you make a purchase, it's crucial to thoroughly read the policy documents because the availability of riders varies from one insurer to another
▶️The Free Look Period
There is a free look period after you get term insurance. This enables you to review the policy carefully. And, should it not fit your needs, you have the option to return it without penalty (well, except for some minimal administrative fees).
▶️Grace And Revival Periods
The grace period allows you extra time to pay any overdue premiums before your coverage ends. In the event that the policy expires, you can reinstate it during the revival period. Remember that each insurer may have unique conditions for these periods, so it's important to thoroughly research them before deciding.
▶️Research And Consultation
Take the time to thoroughly analyse and compare different term insurance policies before making a purchase. Examine the features, advantages, restrictions, and reputation of the insurance company. It might also be helpful to speak with a trustworthy financial advisor who can assist in customising the insurance to your requirements. This will also guarantee a seamless claim process for your family in the event of a claim.
Thus, the purpose of term insurance is to cover risk - it is a pure risk plan and aims at protecting your family and their needs after your death. And it does its job well for a very low cost. If you have financial dependents, we strongly recommend that you purchase a term insurance plan to protect their financial future, should your death happen during the term insurance policy term.
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