Worth Explains - Why A Term Plan Is The Only Life Insurance You Need

In today's world, people¡¯s lifestyle, spending habits, priorities, mindset behind decision making etc. tend to widely contrast from those of earlier generations. While the older generations used to follow the motto of rigorously saving during their work-life years and then enjoying the golden period of retirement, the younger generation now a days prefers to go with the YOLO (You only live once) motto, which makes them enjoy their present life at the fullest instead of keeping every dream untouched till retirement.

However, no matter how much the viewpoints regarding financial life differ amongst various generations, one aspect that still binds them together, is the undeniable importance of life insurance. Will you ever be okay with the thought of leaving your loved ones into a financially vulnerable situation upon your untimely demise? Certainly not, especially post the biggest wake up call globally in the form of this pandemic. So, why not hedge this risk of life¡¯s uncertainty by taking life insurance? Remember that, while it's natural to feel unpleasant about the thought of death, it¡¯s never okay to ignore the fact that it is something that can happen any day.

Now the question arises, which type or form of life insurance to purchase? The answer is - term insurance. Amidst the numerous life insurance policies like ULIPs, money back policies, endowment plans etc pitched with varying motives by your insurance agent, term life insurance simply outperforms all such sub optimal policies in multiple ways.

Let¡¯s first understand what is term insurance and then dig deeper into how it is the only life insurance you will ever need.

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What is Term Insurance?

Just like its name suggests, a term insurance policy provides life insurance cover for a specific period, which is chosen by the policyholder. The primary aim of term insurance is to cover the nominees¡¯ financial future in case of policyholder¡¯s untimely demise during the policy tenure. The fact that term policy is a simple and plain insurance plan aimed to provide replacement income to your nominees in your absence, its premium is highly affordable, especially considering the huge cover amount it offers.

Key Benefits of Term Insurance

- Not only does the policyholder pay fixed premiums throughout the entire tenure of a term policy, but even the premium paid is highly affordable, and probably the lowest amongst various life insurance plans, especially for the huge cover.

- Relatively simpler product in understanding and working, when compared to others like endowment, money-back or ULIP.

- Different variants of term insurance like increasing cover plans and return of premium plans to cater to differing needs and preferences of policyholders.

- Availability of tax benefits. The premiums paid towards the term policy can be claimed for tax deductions under Section 80C of the Income Tax Act.

- Even the death benefits received by nominees or maturity benefits received by the policyholder are completely tax-free.

- Multiple Death Benefit Payout Options in the form of lumpsum or staggered payout like monthly, half yearly etc.

When to purchase term insurance - The sooner the better!

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Once you begin earning, do not keep on waiting to arrive at a ¡®suitable age¡¯ to buy a term insurance plan. The earlier you purchase it, the lower your premium would be.

For instance, a 25-year-old can get Rs 50 lakh cover insuring him till the age of 60 for an annual premium of around Rs 5,000, whereas a 35-year-old would have to pay close to Rs 9,000 annually for the same cover amount insuring them till the age of 60.

Also, given that your cover amount depends on your annual income, many people might think that they would end up with lower cover if they purchase term policy early on in their career when they have relatively lower income. But, such people should remember they can explore options like opting for an increasing cover term plan wherein the insurance cover keeps increasing every year or at certain intervals or life stages, or going for another term insurance later with higher cover when eligible. Also, the more you procrastinate the decision to purchase term insurance in later stages of life, the higher premium you end up paying.

Clearing the air- Term plans cover not just one but 3Ds of life

When it comes to term insurance plans, a widespread misconception that often crops up, is that life insurance policies only payout when the policyholder dies. Contrary to this myth, term plan offers much more than just the death benefit. Term plans cover not one but three Ds of life-Death, Disease, and Disability. thus making it the only life insurance you need.

-Disease (Critical Illness)

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An extremely helpful form of enhanced protection that the insured gets covered when buying term insurance is the benefit of critical illness. Many term plan options are available in the market that tend to offer policyholders quick cash pay-outs upon diagnosis of major critical illnesses such as heart attack, cancer, stroke, or multiple organ failure. Given that a single hospitalisation is capable of erasing your entire lifelong savings, purchasing a term plan involving coverage of critical illness cost treatments is a smart step. Generally, these plans are fixed benefit ones offering lump-sum payout. There are two ways to buy critical illness plans, one being as a rider along with a term insurance plan, and the second in the form of a standalone plan which is offered by most insurers who provide life and health insurance policies.

-Disability

More often than not, many people tend to perceive term insurance as a brilliant way to provide financial security to their family in case of untimely demise, but some fail to recognise the benefit of income protection in the unfortunate event of disability attributed to critical injury or maybe illness. For such cases, one can have replacement income by availing special riders as part of the term insurance plan. Such a benefit not only acts as replacement income but also helps in managing numerous household expenditures like child¡¯s education, hospital bills, house rent, etc. In the event of disability, this rider will usually give you a monthly income for a fixed tenure or even a lump sum pay-out on the occurrence of permanent disability. Herein, the applicable amount that the beneficiary gets, whether partial or full, would depend upon the criticality of the disability which has occurred. Keep in mind that the conditions, as well as payout plans, might differ amongst various insurance companies. Those who have not yet purchased a term plan should ideally ensure to buy an accidental disability rider along with term insurance to cover this aspect of financial uncertainty as well.

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-Death

As known to many, the fundamental element of term insurance is the monetary benefit which the nominee receives upon the death of the life insured, i.e. the policyholder. However, the only condition present is that the death happens within the term insurance policy¡¯s tenure. For those who tend to believe the myth that term insurance is rather an expenditure and not an investment, such people fail to understand that the inherent benefit of such plans is the financial security of the nominees and the peace of mind policyholder gets, which is in itself invaluable. This is especially important for those who are single earners of their house since in the event of their unfortunate demise, their family and dependent one¡¯s financial future will be completely jeopardised by their sudden departure.

Moreover, to pump in a higher degree of flexibility, some insurers even tend to offer maturity benefits as well, in the form of the return of premium cover benefit. Through this benefit, the insurer repays the premiums paid towards the policy if the policyholder survives the term/tenure.

Who in the family should buy term insurance, and how much?

Ideally, the primary earning member of a family should buy a term insurance plan for financially protecting the family¡¯s future in his/her absence. When the need to purchase a term life insurance plan is ignored, your dependent/loved ones would in all likelihood be financially burdened with repayment of ongoing investment contributions and liabilities like home loan, car loan, personal loan, etc., apart from at worst, struggling to meet day to day needs for survival.

Moreover, with the rising trend of dual-income families due to rising lifestyle costs, the earning members of such families can either opt for separate term plans or a joint term plan for couples, depending on their decision and financial requirements. In both cases, the cover would ensure adequate coverage for the other spouse and family in case of the untimely demise of any of the two spouses.

As far as cover amount is concerned, although there is no one size fits all formula, your term insurance cover is ideally advisable to amount to at least 15 times your annual income, or higher if eligible. When deciding upon the cover amount, remember to factor in the dependent¡¯s monthly expenses, your existing and expected liabilities and investment contributions towards crucial life goals and stages and your existing assets and accumulated wealth.

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How long should the term insurance cover be taken for?

The tenure for your term insurance cover should ideally be for the years during which you tend to have liabilities and expect additions in the family, in the form of a spouse, children, etc. Make sure the term insurance plan is long enough to provide cover for the period till which your children complete their education, become financially independent, your liabilities like loans and investment contributions towards any pending goals, are over.

As far as post-retirement coverage is concerned, if you have built adequate retirement corpus after factoring in inflation and longevity risk, and that corpus is good enough to sustain both your and your spouse¡¯s financial needs for remaining life, then you don¡¯t require a term plan post-retirement, i.e. beyond the age of 60 or so. If not, then you can buy a separate term insurance plan to take care of your spouse¡¯s financial health post the age of 60.

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Final Words

Over time, term insurance has been becoming more and more customer-centric, and pumping in higher degree of flexibility and customisation options without compromising on the primary aim throughout-to provide replacement income in the form of insurance cover to the policyholder¡¯s nominees in case of demise during the policy tenure. Moreover, with probably the lowest premiums and simple product nature vis-a-vis other sub optimal insurance policies, term insurance turns out to be a suitable one stop destination for hedging the risk of life¡¯s uncertainties. And the added benefits of maturity benefit, critical illness and disease cover make sure that term insurance does not leave any aspect of uncertainties unattended, through the diverse product features. Lastly, never confuse insurance with investment. Taking life insurance should always be aimed to provide a protection cover to the nominees in your absence or occurrence of a critical illness or disability, whereas investments should be aimed at wealth creation over different investment horizons, to achieve various financial goals. And with a plethora of insurance providers and plans to choose from, that too at your fingertips, it becomes even more imperative to purchase a suitable and reliable term plan to get your loved one's financial future protected.

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