If you are the only earning member of the family, then your responsibility is not only for today, but also for the time when you will not be there. In such a situation, term insurance can become the strongest shield for the financial security of the family in your absence. This is an insurance plan that provides a fixed amount to your family only after your death. In this, no money is received on maturity – hence it is called a “pure protection plan”. Its most special feature is that it provides cover of up to crores at a very low premium.
Traditional life insurance policies have elements like investment and bonus attached to them, so their premium is also high and coverage is often less. On the other hand, a term plan only covers the risk, so you can ensure more security for your family at a lower cost. For example, a 25-year-old healthy person can get a cover of Rs 1 crore at an annual premium of just Rs 10,000 – Rs 15,000. The purpose of term insurance is to ensure that your children’s education, home loan, parental care and living expenses continue uninterrupted if you die prematurely.
Also read: Best term insurance plans for self-employed individuals
Now the question arises: How much insurance should you take? There are 4 main methods to answer this question:
Income Replacement Method – Your current annual income × years till retirement.
Expense Replacement Method – Assessment according to your monthly expenses, debts, children’s education and lifestyle.
Human Life Value Method (HLV) – Calculation keeping in mind your total earning capacity.
Thumb Rule – Coverage should be at least 10–15 times your annual income.
IRDAI (Insurance Regulatory Authority) has recently issued some important guidelines regarding term insurance. Companies will now have to make all the terms and claim process of the policy more transparent. Apart from this, insurers will also have to ensure that the policy is sold to the customer according to his need and earning capacity. This will protect those who are often forced to buy more cover than they need.
Term insurance not only provides a solution to the uncertainty of life, but is also an important pillar of financial planning. Hence, while buying insurance, it is important to take into account your responsibilities, current and future needs, debts and lifestyle. Remember, insurance is not an expense but a long-term security investment.
Summing up…
If you have a family to look after, term insurance is not just an option but a necessity. Deciding on the right coverage is as important as buying insurance. The above-mentioned methods can help you evaluate it yourself – and thus ensure that your loved ones have a secure and dignified future even after you are gone.