Trust on 'term insurance'

Life insurance is an important tool that offers the ability to plan for unforseen events that can affect the family's financial situation adversely.

Though designed with income replacement as the top most reason why people should buy a life insurance cover, in India life insurance is bought, but for the wrong reason. It is either bought to save taxes or bought for investment purposes. There is a flaw in each of these reasons.

If you buy just to save tax, then you focus on how much to save in order to minimise the tax burden. You are not looking at what your actual insurance need is. When you are looking at it as investment, you are looking at the rate of return and what you will get back in the next few years, you are not even asking what is the sum assured.

Insurance needs to be bought for its own sake. It caters to the most utmost need in the event of demise of a person. The insurance takes care of the kith and kin of the deceased person. It is advisable, therefore to have a term life cover.

The best selling policies have been endowment assuarance policies that double as investment options with tax breaks. It is the two in one profile that most insurance buyers are attracted to. However, term covers derserve a deep hard look too.

Term life insurance is perhaps the simplest form of life insurance. It provides death protection for a stated time period, or term. Designed to provide temporary life insurance protection on a limited budget, term insurance turns out to be cheaper because the entire premium amount goes towards covering the risk of life. In the event of death during the policy term, the dependents will get the cover amount, but if the insured survives the policy term, no benefits or sum assured is received

Term insurance revolves around three factors. The amount of risk cover, age of the person, and the length of the cover defines a policy and the premium. In case of term plans, it is lower than any other category of risk cover.

The difference between the assets one earns and the current expenses need, is the amount of cover required. While there is no one formula that gets the ‘right cover’, we can work with a rule of thumb and insure our lives for between seven and ten times our annual income.

The best time to buy the term cover is when you have a family depending on your income. Or else when a family has a huge gap between current savings and future goals.

The need for insurance starts reducing as a person hits the age bracket of 50-55 years as the retirement corpus begins to bloat. But, if you feel that your financial plan doesn’t conform to this model, tank up on insurance by age as term plans have a maximum entry age built into them.

As no surrender or maturity values are attached to a term plan, choose the longest possible plan with the lowest premium.