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Term Insurance Considerations

More and more Indians are accepting that “not receiving anything at the end” of the policy term isn’t necessarily a bad thing

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If there’s one thing that COVID has brought about, it’s a growing awareness about the importance of pure term insurance these days. More and more Indians are accepting that “not receiving anything at the end” of the policy term isn’t necessarily a bad thing. Lots of smart young savers are recognizing the importance of unbundling their protection needs from their investment needs, achieving higher returns and better life coverage in the bargain – with the added benefit of more transparency in terms of costs incurred.

Term is a must have insurance product for a person having dependents. It provides substantial life insurance at an affordable price. In fact, a 35-year-old male can achieve a death benefit as high as Rs 1.5 Crore, for a 35-year term, for an annual premium as low as Rs 17,000 or so.

Those who balk at the fact that term insurance premiums will essentially be “consumed” by their insurer and no pay-outs will be made available at the end, need to consider the fact that the same quantum of mortality costs are priced into other life insurance products (such as ULIP’s and traditional plans) as well. For instance, if one were to purchase a ULIP and aim for a similar death benefit of Rs 1.5 Crore from it, an amount not too different from the term insurance premium would in fact be deducted from their investments in the form of cancelled units.

Term Plans are the best way to protect one’s family and dependents from any loan, education loan, home loan or any other similar short-term liability in case of their death. They are very easy to understand, compare, and buy. A number of innovative term insurance plans now cover the financial risk arising from lifestyle diseases such as heart attacks, strokes and cancer too. 

Another question that typically arises is – just how much term insurance coverage should you aim for? Here’s a thumb rule - your cumulative death benefit should cover for your dependents till the time they don’t start earning. In other words, it should be considerable enough to replace your income in your absence, ideally 15-20 times your current annual income. 

There are a few other considerations to be made. For instance, one must opt for a term plan after thorough research, incorporating the best features and ensuring benefits are paid according to the specific needs of one’s family. One should also decide whether one wants their family to receive a lump-sum, or staggered pay-outs planned systematically, in case of an unfortunate eventuality.  Additionally, the insured person must educate his or her dependents on the importance of the term insurance plan, its claim settlement process, and how to best utilise the lumpsum benefit.

Intuitively, it follows that when it comes to term insurance, “cheap” isn’t always “best”. One must take the Claim Settlement Ratio of the prospective policy into account, prior to making their decision. IRDAI publishes Claim Settlement Ratio data on its website on an annual basis. Often, cheaper plans come with lower Claim Settlement Ratios, and buying into them could end up being penny wise, pound foolish - as your dependants may not receive the pay-out proceeds when they need it the most.

A final question – does everyone require term insurance? Not really. Term Insurance is a pure risk transfer tool, and if there’s nobody who would get financially affected by the loss of your life, you don’t need it. A person who does not have dependents, and has a solid asset base in place may possibly not require a term insurance plan. 

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