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The magic of term life insurance
 

The magic of term life insurance

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Term life insurance is not just a great value proposition, but also the most important insurance to buy. To understand term life’s magic we need to step back and answer the fundamental question - ...

Term life insurance is not just a great value proposition, but also the most important insurance to buy. To understand term life’s magic we need to step back and answer the fundamental question - Why do you need life insurance in the first place?
What is life insurance and why does it exist?
Life insurance is meant to address the fundamental need of financial security for a family if the main wage earner dies prematurely. Dying early leaves the dependents of the deceased, vulnerable to the vagaries of life. There is a loss of income and in many cases debts to pay. The future economic prospect of the dependents is severely impacted. There are also non-economic consequences of a premature death – the emotional loss for example. However, insurance as an instrument addresses only the financial part of the loss. It cannot mitigate the emotional loss felt by the death of a family member.
Insurance exists because of risks. If there are no risks, and events are certain, there is no need of insurance at all. On the other hand, only those risks that are uncertain are insurable. For instance, death is a risk and it is certain and hence there is no life insurance available for the event of death itself. It is only the timing of death that is uncertain and can be insured.
Much too often life insurance is thought of as a means of getting good investment returns or tax benefits. While life insurance can meet these objectives these are peripheral to the primary purpose of protecting the family in case of the wage earner’s premature death.
How to address the risk of premature death in the family? – The crucial role of term insurance.
A premature death impacts immediate dependents – spouse, children, aged parents. Frequently the financial setback is so severe that it sets back the economic prospects by a decade or more. Often times, the impact is so severe that the family unit takes a generation to recover. No responsible person would like this to happen his/ her dependents. People would like to have a mechanism to take care of such eventualities. A responsible person would like to make sure that there is a compensation which takes care of the current lifestyles of the dependents for at least 10-15 years, if not more.
This needs careful thinking and considered decision making. The most important decision is calculating the sum of money that will meet the family’s needs. The next important decision is to select a plan which most efficiently delivers the amount. By efficiency we refer to the cost of the insurance. It is no use paying such a high premium for insuring the unknown future, that your present is adversely impacted. After all we are talking of an event which has a low probability of occurrence.
Term Life Insurance is the most efficient plan for addressing this need. It is a plan which insures against such eventualities without burning a big hole in your pocket. It is a pure insurance product. If you live through the policy term, you do not get back the p

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    The magic of term life insurance The magic of term life insurance Document Transcript

    • The Magic of Term Life InsuranceTerm life insurance is not just a great value proposition, but alsothe most important insurance to buy. To understand term life’smagic we need to step back and answer the fundamentalquestion - Why do you need life insurance in the first place?What is life insurance and why does it exist?Life insurance is meant to address the fundamental need of financialsecurity for a family if the main wage earner dies prematurely. Dying earlyleaves the dependents of the deceased, vulnerable to the vagaries of life.There is a loss of income and in many cases debts to pay. The futureeconomic prospect of the dependents is severely impacted. There are alsonon-economic consequences of a premature death – the emotional loss forexample. However, insurance as an instrument addresses only thefinancial part of the loss. It cannot mitigate the emotional loss felt by thedeath of a family member.Insurance exists because of risks. If there are no risks, and events arecertain, there is no need of insurance at all. On the other hand, only thoserisks that are uncertain are insurable. For instance, death is a risk and it iscertain and hence there is no life insurance available for the event of deathitself. It is only the timing of death that is uncertain and can be insured.Much too often life insurance is thought of as a means of getting goodinvestment returns or tax benefits. While life insurance can meet theseobjectives these are peripheral to the primary purpose of protecting thefamily in case of the wage earner’s premature death.
    • How to address the risk of premature death in the family? – Thecrucial role of term insurance.A premature death impacts immediate dependents – spouse, children,aged parents. Frequently the financial setback is so severe that it sets backthe economic prospects by a decade or more. Often times, the impact is sosevere that the family unit takes a generation to recover. No responsibleperson would like this to happen his/ her dependents. People would like tohave a mechanism to take care of such eventualities. A responsible personwould like to make sure that there is a compensation which takes care ofthe current lifestyles of the dependents for at least 10-15 years, if not more.This needs careful thinking and considered decision making. The mostimportant decision is calculating the sum of money that will meet thefamily’s needs. The next important decision is to select a plan which mostefficiently delivers the amount. By efficiency we refer to the cost of theinsurance. It is no use paying such a high premium for insuring theunknown future, that your present is adversely impacted. After all we aretalking of an event which has a low probability of occurrence.Term Life Insurance is the most efficient plan for addressing this need. It isa plan which insures against such eventualities without burning a big holein your pocket. It is a pure insurance product. If you live through the policyterm, you do not get back the premiums that you have paid. However, itoffers a high leverage in the event of death as beneficiaries get acompensation which is far in excess of the premiums paid. In fact thedifference is in orders of magnitude. There is no other instrument whichoffers such leverage.A word of caution before you rush off to buy a term insurance plan - you donot need term life insurance if you have no dependents, nobody else relieson you for financial support, and you expect the situation to be similar in theforeseeable future. Ideally, the plan should be bought by a person who isaged 50 years or less and for the maximum term available. Typically theseplans apply up to the age of 65. Hence a 40 year old should go for a 25years plan, a 35 year old for a 30 years plan, and so on.What is the life cover required?The most important aspect of buying life insurance cover is not thepremium to be paid, but the cover that the insurance provides (expressedas the Sum Assured).
    • There are different methods of estimating the cover. Some of these aredescribed below:Cover estimated as a multiple of annual incomeThe cover required depends on the number of years you want to providefor, the cost of living of your dependents, the expected inflation and thedebts that you leave behind for them to service. This will vary for differentindividuals, but typically “debt + 7 times the current annual expenditure isthe minimum amount of insurance cover required. Depending on individualneeds this amount can be higher by a factor of 2 to 3.Let’s take a few examples to illustrate this.Consider a family with annual expenses of Rs 5 lakhs, which has a homeloan of 25 lakhs and other debts of 5 lakhs. The minimum cover requiredworks out to 65 lakhs.If we consider a more affluent household with annual expenses of Rs 10lakhs, which has a home loan of 50 lakhs and other debts of 10 lakhs, theminimum cover required works out to 1.3 crore. The cover required is theextent to which a person chooses to provide for his or her family afterdeath. However, there is a price to pay – the higher the cover the higherwill be the premium amount. Hence, a person needs to balance thepremium paying capacity with the need. Theoretically, a person can buy acover which may be one fourth the amount calculated and save greatly onpremium. However, this defeats the purpose of buying the insurance,because if the eventuality occurs, the family is really in trouble.Let’s take a numerical example to illustrate this point further:Consider a 30 year old earning Rs ten lakh per year requiring an insurancecover of Rs 80 Lakh. The typical insurance options and correspondingpremiums (approximately) will typically be as follows* (25 years term periodis assumed) –
    • * The above figures are approximate to illustrate the order of magnitude.The actual figures will vary depending on several factors, and will vary fromcompany to companyGiven the annual income profile and the insurance needs, the onlyaffordable insurance in the above example was term life insurance. Theother two insurances are not affordable, for the person in the specificexample. Opting for those options implies compromising with the cover(one can reduce the premium expenses at the expense of the sumassured).Notice, that a term endowment like solution could have been achievedmore efficiently with a term insurance with a premium of 25,000 combinedwith a fixed deposit of 80,000 every year (at 9% pa interest).In reality, all the returns displayed by various endowment policies can beachieved more efficiently, by combining ordinary financial instruments withthe term life policy. The term life policy ensures that the primary coveredrequired is achieved without stretching your finances.The strong value proposition of Term Life Insurance
    • We have gone through the rationale and objectives of insurance and ourview is that term life insurance is not only a great value proposition, buttruly the most important insurance to buy. This is because term life:• Ensures the highest sum assured or death benefit of all life insuranceproducts.• Has the lowest costs thereby helping you have enough liquidity to saveand invest at yourpace to address your wealth creation needs. Whencompared on a death benefit basis, term life is less than x % of the cost oftypical unit link or traditional plans.• Is eligible for tax benefits on the premium paid and on death. Premiumsare covered by section 80 C… and death benefit is tax exempt undersection 10(10D). This is unlike unit link products where the maturitybenefits are taxable if Premium is more that 20 % of the sum assured.• The payment structure in term life is flexible. You can stop payingpremiums at any time if your requirements change and you no longer needto cover. This is not possible in other insurance products without paying aconsiderable surrender penalty.How to go about buying Term Life Insurance?The various steps involved are -• Identify the risk cover required. This is the most important step.• Compare the offerings of different Life Insurance companies.Compare on:• Price• Terms and Conditions Offered• The claims handling record of the companies• Service Track record of the companies (various independent surveys)SecureNow does this for you. Depending on your needs, we get the bestterm insurance policy for you from the panel of leading companies that wetie up with.As independent insurance brokers, we act on your behalf at the time ofrecommending the risk plan and do not keep the insurer’s interest ahead ofyours. We continue to serve you till the settlement of the claim, if any.
    • Our role lies in finding as good a match as possible for your needs fromamong the competing insurance products on the market and, wherenecessary, stimulating insurers to modify their polices or to create newcovers in order to meet your needs better.For InquiriesVisithttp://securenow.in/Fill in our inquiry form