The importance of buying term insurance

Each individual has aspirations and financial goals for which a regular monetary contribution is made towards building a corpus. The premise being, over a period of time the savings pool will enable fruition of financial goals. Financial goals could vary from a down payment for a house, a child’s higher education etc. The question individuals need to ask themselves is what happens to the family in case of my demise?

Term insurance is a unique financial instrument enabling a family to continue with their lives. This product should form the foundation of any financial plan. The mantra is “first Protect then Save.” They act as an income replacement tool for the family in case of demise of the breadwinner.

Income replacement?

These products are the purest form of life insurance, as long as the individual continues to pay premiums, life cover continues. The loss of the breadwinner causes significant emotional and financial distress to the family.

Term plans make a payout to the family becoming their lifeline, allowing them to continue with their lives. Individuals can choose from lumpsum or monthly mode or a combination of both.

The lumpsum claim amount can be used to settle outstanding financial liabilities e.g. a home loan, ensuring the family has a roof over their heads. The monthly mode ensures regular income for the family.

Affordable?

Term insurance plans are an investment towards the family’s financial security during their hour of need.

Term insurance plans are the cheapest form of life insurance as they offer pure life cover. For as little as Rs 10,000 to Rs 12,000 a year, a 30-year-old non-smoking male can get a cover of Rs 1 crore for a period of 30 years.

Individuals have the flexibility to choose the frequency of premium payment which suits them best.

Other benefits?

Traditionally, term insurance plans offered a plain vanilla death benefit. Today, life insurers offer term plans with health insurance benefits by way of built-in critical illness feature.

With the current lifestyle, individuals are susceptible to serious ailments. Few term plans offer cover against critical illnesses e.g. cancer including ovarian, cervical and breast, kidney failure, Alzheimer’s, Parkinson’s etc.

Benefits

Medical science has increased life expectancy, simultaneously costs have risen exponentially e.g. chemotherapy alone costs approximately Rs 15 lakhs. A critical illness can exhaust the savings kept aside for the family. For a few critical illnesses, a lumpsum payout is made upon being diagnosed. This takes away the anxiety of raising finances for the treatment.

Importantly, life cover continues even after the critical illness claim is paid out. New-age term plans offer health insurance benefits to policyholders and life insurance benefits to the family.

Right time to buy term insurance?

It is advisable to buy term insurance as soon as individuals start working. The tenet being a younger individual is healthy, hence the premium for younger individuals is lower vis-à-vis older individuals.

Since the premium remains constant throughout the tenure of the policy, younger individuals can get a large life cover for a longer duration.

How much life cover is adequate?

The concept of Human Life Value enables individuals to arrive at an adequate amount of life cover. The general thumb rule being individuals up to the age of 40 years should have a life cover of 15-20 times their annual income, in the 40s a life cover of 10-15 times annual income and in the 50s a life cover of 5 times annual income.

Life insurers recognise that as individuals reach certain life stage milestones for e.g. marriage, first child etc. it means increased responsibilities and therefore provide flexibility to enhance life cover. Ideally, the life cover should continue until retirement to mitigate the financial risk associated with an untimely demise.

Information to share?

The fundamental premise of buying term insurance is financial security for the family.

Furnishing incorrect or withholding personal health-related information will result in claim rejection and leave the family financially vulnerable.

Who should I buy from?

The premium amount should not drive the purchase decision. Select a life insurer having a consistently high claims settlement ratio, a low claims settlement turn-around-time, low grievance ratio and a robust claims settlement platform. Some life insurers settle genuine death claims in one day after all required documents are submitted.

The brand should evoke confidence in the mind of the individual of the death claim being settled quickly.

Term plans provide peace of mind to the breadwinner, knowing the family has financial security.

(The writer is Deputy Managing Director, ICICI Prudential Life Insurance Company Limited)