Buy term insurance for financial security

This profession provides me the great opportunity of meeting people from varied professions. We discuss varied subjects — latest Bollywood movies to the US elections to the effect of demonetisation. Most conversations drift to personal finance as the subject interests me deeply. I end up striking a conversation about financial planning and life insurance.   

While most people I interact with have a life insurance policy, they do not understand the product they have bought. When asked which insurance policy you own, the typical response I get is ‘I pay an annual premium of Rs 30,000.’ As I probe further, I find that a majority has savings-cum-insurance product or a unit linked insurance plan. So in this scenario, a person paying Rs 30,000 annually gets an insurance cover of just Rs 3 lakh. 

Are you wondering why Rs 3 lakh is not enough? Let me answer this question by first explaining what insurance is. Very simply put, insurance pays for expenses incurred towards damage of an insured item. 

What if the insured item is a person? Let us take the example of Vijay who earns Rs 5 lakh every year, is married to Meera, who is a housewife, and has a daughter.

Given the rising uncertainties in today’s world, what happens to the family if an unfortunate event befalls Vijay? His family will not only lose him, but also the financial safety that his income provides. Without an alternate source of livelihood, Meera cannot manage the household.

In this scenario, imagine Vijay had only Rs 3 lakh worth of insurance cover; it does not even equal his annual salary.

Vijay should have bought an insurance cover that at least replicates his annual income until his family finds an alternate source of income.

Assuming Meera invests the insurance amount in a fixed deposit earning 8% annually, Vijay should have bought a cover of Rs 60 lakh. An 8% interest on Rs 60 lakh would mean an income of Rs 4.8 lakh for his family.

In other words, he should have first bought the life cover that would financially secure his family. Now, how does he find the most cost effective life insurance cover? He should opt for a term insurance product; it is the cheapest way of buying life cover. Assuming he is 35- years-old, Vijay will have to pay an annual premium of about Rs 6,500 for a cover of Rs 60 lakh. 

Term insurance is the most ideal tool for providing financial security to your loved ones. It provides a life cover at lower premium rates, is easy to understand, flexible and provides a tax benefit. In brief, term insurance offers an inexpensive and simple method of ensuring financial security for your loved ones.

The question arises that if term insurance is an ideal product, why do so many people buy savings-cum-insurance or a ULIP product first?

For many years, life insurance in India has been viewed as a vehicle for savings for the long-term. While it is important to save for one’s retirement, child’s education and so on, it is even more important to financially protect the family if something were to go wrong. Therefore, one should first buy a term insurance for the right insurance cover and only then buy other products.

An uninformed purchase can lead to inadequate cover. Before you buy a term plan, it is crucial you conduct a thorough research and get a proper understanding of the product that matches your needs. With a wealth of information available at your fingertips, it is easy to compare the products as well.

You must consider several factors before buying a term insurance. The cover should be enough that it can replicate your annual income and ensure that your loved ones are financially sound until they find an alternate source of income.

(The writer is MD and CEO, Aegon Life Insurance)