Everything you need to know about term insurance

term or life insuranceDo you have life insurance? If yes, then how much does it cover? Is it sufficient to cover your family’s expenses for a few years in case you pass away? Did you know you can insure your key employees’ lives to protect your company?

Too many people put life insurance on hold. They think they don’t need it. They do not factor in how fragile human life is and so, in case of their untimely demise, leave their dependent family not just with emotional loss but financial uncertainty. Businesses that don’t buy life insurance for their key employees leave themselves open to risk.

Here’s everything you need to know about life insurance:

What types of Life Insurance Plans can I buy?

Pure Term Plans: These are the simplest, the cheapest and the most basic of the Term Plans in which the dependents are assured a fixed sum on the eventuality of the policy holder passing away during the term. However, no maturity value or bonus would be paid, if the policy holder survives the entire term of the policy.

Keyman Insurance: Keyman insurance is meant to protect a company from financial loss arriving out of eventuality of any of its key employees. This Insurance is bought by the Company and considers the profitability of the company but not the salary income of the key-employee. Hence, Premiums are also paid by the Company.

Return on Premium plans: These plans are for people who want something in return for all the premiums they have paid during the policy tenure. This policy returns the premiums along with loyalty additions if any, at the time of maturity. Full sum assured along with loyalty addition, if any, would be paid in case of any eventuality during the term of the policy.

Decreasing Sum Assured Plans: In this plan, the sum assured decreases every year while the premium remains constant. The premium for this plan is cheaper than the normal plan. This type of plan is popular for mortgage or for loan protection.

Increasing Sum Assured Plans: This plan is exactly opposite to the decreasing plan. In this type of plan, the sum assured increases as the age advances. The plan is based on the concept of rising inflation. The premiums for this plan are on the higher side.

Who can buy term-insurance?

While, there are no restrictions for buying a term-insurance for yourself a buyer must have insurable interest on the person he/she is intending to buy the insurance. Most policies require you meet the following criteria:

  1. A legally enforceable relationship between the Proposer and the Insured (Eg: Spouse /Parents / Children/ Business Partner etc.).
  2. A Financial relationship between the Proposer and the Insured in case buying for a Business Partner. A person can buy insurance for his business partner only to the extent of his/her financial dependency on the insured.
  3. The person buying the insurance should be over the age of 18 years.

How much life insurance cover should I buy?

The policy should cover the essential requirements of the family members in case of eventuality. Insurance companies use a ‘Human Life Value’ (HLV) calculator to arrive at the Net Present Value of one’s potential future earnings over the rest of his/her lifespan. A rule of thumb is that the insurance should cover one’s major future commitments such as Child’s education/marriage and Present & Future liabilities such as Home Loans, Personal loans etc. Similarly, for employees, understand the value of the business they handle. Do not try to insure them based on their salary but on the monetary value of the business they manage.

The amount of life insurance premium varies from person to person based on the Sum-Assured, Age and Health Condition. The younger the insured person’s age, the lesser would be the premium. Any declared or observed illnesses will add an extra amount to the premium.

What should be the tenure of the life insurance policy?

The best practice is to pay for coverage till the age you expect to be working & contributing to your dependents. While you may want to pay for coverage well into your twilight years, different insurance companies have different age caps for different policies. Since insurance coverage lasts for 25-40 years and is capped between 65-80 years, you need to plan accordingly.

Can I add features to my policy?

Riders are optional add-ons that cover risks which are beyond the scope of the main life insurance policy. Adding riders to your original policy will result in a more comprehensive protection. Common Riders are critical illness, permanent total disability and accidental death. It goes without saying that adding riders to your term policy will increase the annual premium you pay.

Which policy should I buy and from where?

In order to buy a policy, you need to know your insurance needs. Some pointers before you choose an insurance policy are:

  • Find a policy that meets your financial needs
  • Choose a reputed insurance company
  • Choose an insurance company with a good claims record
  • Do not buy more insurance than you need. You don’t want to overpay premiums.

Insurance policies can be bought from an Insurance Broker (Adviser and representative of the customer) or through an Agent of an Insurance Company (representative of a specific insurance company). Insurance Brokers represent the customers and have access to insurance policies from different insurance companies. This makes them the best consultants to approach for an unbiased advice unlike the agents of the individual insurance companies whose offerings would be restricted to their own products. You can buy Insurance policies either online or physical by visiting insurance company offices.

Buying life insurance should be an obvious choice but too many individuals and companies ignore it. They don’t see any obvious benefit in insurance while forgetting that the life insurance is a fund for the worst eventuality. Compared to the premium price, the benefits offered are huge. If you choose the right policy, from a company with a streamlined and fair claims process, you will be taking a huge step towards staving off financial calamity.

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