You work hard to ensure the needs of your loved ones are fulfilled and they get to experience the best in life. The family deserves it. Term insurance, the purest form of life cover, is the most conventional form of insurance. Term insurance benefit – financial independence of your family is not compromised in your absence. Return of term insurance involves payout of the sum assured as a lump sum in case of death of the insured. People seldom get confused about the utility of life insurance and that is what we want to elucidate here.
- Who should buy term insurance?
- What is the right amount?
- What if one outlives the insurance tenure?
- The right age to buy term insurance?
- Will I get the sum assured?
Do you have a family – dependent parents, spouse, dependent children, or siblings? If the answer is yes, then it is essential to buy a term insurance policy. In case of an untoward incident of death, the arrival of insurance funds (i.e. sum assured) can be a real blessing. These funds can:
- Help maintain the lifestyle of surviving family members
- Pay-off recent medical bills
- Meet short-term family goals (child education, marriage in family, etc.)
- Protect erosion of family wealth
- Pay any existing loans
Buying term insurance is simple
Yes, its very simple to buy term insurance. You can buy it online from any insurer’s website, offline by a visit to the insurer’s office, or through an authorized agent or third-party websites. The insurance premium is generally fixed and is paid over the length of the policy term. Premium also qualifies for tax benefits under section 80C of the Income Tax Act.
Return on investment in case of a term insurance
Return in the form of lump sum payment is expected in case of death of the policyholder, which essentially means – if the policyholder outlives the policy tenure, there will not be a return. The idea here is not to earn, instead, the objective is to provide financial security to the family. Consider this as an umbrella that saves your family from an untimely rain (demise of the policyholder).
How much term insurance should you buy?
There is no scientific term insurance calculator to determine the term insurance amount, but it is suggested that the sum assured should be in the range of 5-10x the annual income. Alternatively, multiply your annual income with the balance numbers of earning years left to arrive at the sum assured.
Example 1 –
Current age 25Yrs. The income of Rs5Lacs p.a. Earning age until 60Yrs
|5X Income||10X Income||Income X Balance earning years|
|Rs25 Lacs||Rs50 Lacs||5 X 35 = Rs 1.75 Crores|
>> Recommended term insurance value in the range of Rs 50 Lacs – 1.0 Crore
Example 2 –
Current age 55Yrs. The income of Rs40Lacs p.a. Earning age 60Yrs
|5X Income||10X Income||Income X Balance earning years|
|Rs 2 Crores||Rs 4 Crores||40 X 5 = Rs 2 Crores|
>> Recommended term insurance value in the range of Rs 2.5 – 3.5 Crores
Example 3 –
Alternative way is to consider the outlays to determine the principal required to earn equivalent interest through bank fixed deposits.
- Cost of living based on city of residence
- Big-ticket expenses like child education/marriage
- Existing debts and installments
- Number of dependents and their age
- The medical condition of dependents
Consider a bank interest rate scenario of 5.5% p.a. In continuation from the above, below is how we can determine the sum assured.
Example 1 – annual expenses of approx. Rs 4.5 Lacs. The sum required is Rs 82 Lacs. (4.5 Lacs divided by 5.5%)
Example 2 – annual expenses of approx. Rs 20 Lacs. The sum required is Rs 3.6 Crores
Remember to account for all state & central government personal taxes. Those have not been factored in the above calculations. For instance, if you are liable to pay 10% of your annual interest income in tax, then in example 1, the sum assured should be Rs91 Lacs.
Insurance premium and riders
Premium is based on the age and health of ‘to be’ insured at the time of the policy issuance. The premium is generally low if you subscribe to a policy at a young age. If you have not yet bought the policy, purchase it now – just that the premium will slightly more and, costly premium due to late entry age is a disadvantage of term insurance.
Insurance companies do offer benefits (also called riders) that are worth considering – but remember any additional benefit comes at an additional cost. Some of the riders are:
- Life cover extended up to 85 years of age
- Continued monthly payments, over and above lumpsum settlement at the time of death of insured
- Waiver of premium in case of permanent disability of insured, but the policy continues
- The additional sum assured in case of death due to an accident
- Insured gets an assured sum in case of getting diagnosed with a critical or terminal illness
Insurers also offer joint term insurance policies. This works on the principle of first death – if any one of the two insured persons die, the surviving policyholder receives the lump sum pay-out of the sum assured.
Documentation for claim processing
To complete the term insurance claim process, these documents are required:
- Duly filled in claim forms as provided by the insurer
- Original policy documents
- Post-mortem / FIR / viscera report (as may be applicable)
- Certificate from physician/hospital showing the cause of death and other medical records
- Age and identity proofs of deceased and nominee
- Any other documents as may be specifically required by the insurer
Claim process is simple and settlement ratio is high
Usually, the claim process is straight forward:
The settlement ratio in case of death claims is usually high. Still, over two out of a hundred claims are not processed in favor of the insured. The below table illustrates the number of claims in the last year and the settlement ratio across insurers:
Source: IRDAI Annual Report 2018-2019
A term insurance policy is not an investment plan, never buy term insurance with an expectation of a return. Receipt of sum assured in case of an untoward incident should relieve you of worries about the financial security of your family. Think prudent and be futuristic as you decide the term insurance amount and choose the insurance company.
The author of this article is a senior finance professional with over fifteen years of work experience in corporate finance and has an affinity towards the subject of personal finance and investment management. Please leave your comment or share thoughts on this article via email at firstname.lastname@example.org. For more articles, please visit the website www.decodefinance.in.
Disclaimer: The article is based on the author’s knowledge, experience, and understanding of the subject. Any views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author’s employer (past or current), organization, committee, or other group or individual.
Under no circumstances the author shall be liable for any views or analysis expressed in this note. Further, the views expressed are not binding on any authority or Court. Readers are advised to consult their financial advisor for advice for their specific case.