This is the most basic plan and simplest form of insurance offered by the life insurance industry. In this plan the life insurance company promises to pay a specified amount (sum insured) if the insured dies during the term of the plan. If the life insured survives the entire duration of the plan then they will not be entitled to anything, meaning that there is no maturity benefit with such policies. So in short, this plan offers only death cover in the event of the death of the life insured during the period of the plan.Key Points:
- Tenure: as the name suggests these plans offer protection only for a specified term. Normally the term starts from 5 years and runs to 10, 15, 20, 25, 30 years or any other term chosen by the insured and agreed by the insurer.
- Protection against liabilities: to cover larger liabilities like home loans or car loans, term insurance covers is the best solution. Insurance companies, under some term plans, allow the life insured to increase or decrease the death cover during the term of the plan.
- Minimum and maximum sum insured: for most term plans the insurance company specifies the minimum and maximum sums insured. For some insurance companies the maximum sum insured is subject to underwriting.
- Minimum and maximum age: most insurance companies specify the minimum and maximum age at entry and exit for term plans.
“At Early stage of life :- Jab Insurance Deta h to Leta Koi Nhi.
At later stage of life :- Jab Insurance Leta h to Deta Koi Nhi.”
How much term insurance I’ve bought?
This is how I have calculated my needs – as I mentioned above, I see term insurance as something that will replace the cash flows that I would bring to meet my family’s expenses in case I were to not die. So if I expect my wife to survive 20 years after I’m gone (I’m keeping my children out of this as by the time I die, I’ve assumed that they would be living their lives independently), the amount of term insurance I must have is: (20 years x 12 months per year x Assumed Monthly Household Expense in the year I die) x 1.5 = 240 months x Rs 50,000 x 1.5 = Rs 1.8 crore
Why did I multiply my insurance requirement by 1.5 in the above formula?
Well, that is to have a margin of safety in case I die much earlier than expected (and thus my wife would need much greater cash flows to survive the remainder of her life). Also, one thing missing from the above formula is any debt/loan I may have as of now (and I have zero debt as of now). If you have, say, Rs 20 lac of housing or other loan, just add this amount to the above calculation, and you can arrive at the total term insurance you need. So, as the above calculation shows, I need term insurance worth Rs 1.8 crore. As of now, I am still short by Rs 30 lac, which I will cover up soon .
Insurance in whose name?
I bring in cash flows to run my household, so the term insurance policies must be in my name.
Remember again, I must not get emotional here and try to insure the “life” of my wife and children, in case they are not adding to the household cash flows.
In short, term insurance acts as a replacement for cash flows, so as a rule, you should only insure people whose death would mean a financial loss to you (and it’s most likely ‘you’).
Insurance isn’t investment
You take term insurance because you consider the probability of dying within the insured period high enough, so that your dependents can get the sum assured.
But if you don’t die within the insured period (20 or 30 years as the case may be), you won’t get anything from the insurance company.
In other words, if you survive, there’s “no” return of capital in a term insurance. And thus, it must not be considered as an alternative to investments, or an addition to your investment portfolio.
Term insurance has just one purpose – to replace an economic loss. That’s it!
It’s not for education savings. It’s not for retirement savings, or to provide a tax-free loan later in life. No matter how much term insurance you buy (or are sold), it will never replace an emotional loss.
So buy sensibly…but just buy it!