Protect first, save next: Why it's important to get a term insurance plan

Financial planning is the responsibility of every individual and it is equally important to ensure that the financial plan continues uninterrupted, in case of an eventuality. Loss of the breadwinner can cause financial difficulties for the family. A term insurance plan protects the family financially, in the absence of the earning member.

Below are some questions related to term insurance that buyers often ask:

My financial plan focusses on corpus building through savings. Do I still need financial protection?

It’s not ‘protection or savings’. You need both. Purchasing adequate financial protection should be the first step of every financial plan - this ensures the plan’s continuity in case of an unfortunate event. Building a corpus is a long-term financial goal. Protection ensures that the goal is achieved despite an eventuality.

What are the returns that I will get at the end of the policy tenure?
Term insurance offers pure financial protection. It is designed to provide a lump-sum amount to the dependents in case of death of the policyholder.

How much does term insurance cost? How is it different from an insurance policy which offers some returns at the end of term?
You can purchase life cover worth Rs. 1 crore for a premium ranging between Rs 8,000 – Rs.10, 000, which is as low as Rs 22 per day.
Insurance policies other than pure term actually help in savings or wealth creation. A savings plan used for financial protection would cost you approximately Rs 10,00,000 for the same amount of life cover i.e. Rs. 1 crore – thus you can see how cost effective term insurance can be.

How much insurance do I need?
Your life cover should take into account your current income, expenses, number of working years remaining, liabilities e.g. home loan, child’s education, etc. If you are earning Rs. 65,000 currently, a life cover of Rs. 1 crore will ensure that your family continues to receive this amount even in your absence at 8 percent rate of interest. It practically serves as a replacement for your income.

That way you would be assured of your loved ones being financially provided for, in case of an unfortunate event.

Does my need for life cover change?

Ideally, you should revisit your life cover when there is an increase in income, expenses as well as increase in responsibilities. As a rule of thumb, individuals up to the age of 40 need insurance equivalent to 20-30 times their annual income. A person in his 40s will need protection that is 10-20 times the annual income and a person in his 50s will need cover about 5-10 times the annual income.

Does my policy premium increase with age?
Once a term plan has been purchased, the premium remains unchanged. If another plan is purchased at a later stage, the new premium depends on age, health, etc. at the time of purchase. Also, purchasing term at a higher age would cost more. For e.g. Rs.1 crore of life cover at the age of 30 would cost approximately Rs 8000 – Rs 10,000. The same policy at 40 would cost Rs 18000 – Rs. 20,000. Hence an early start is recommended.

However, as a first-time buyer at 40, the premium amount should not be a deterrent. It is never too late to purchase protection, especially if you have dependents and have not earned enough wealth.

What should I look for while buying term insurance?
It is necessary to select a life insurer with consistently high claims settlement ratio. Equally necessary is evaluation of the time taken by the company to settle claims.

Is it true that claims get rejected? What are the things that I need to be careful about?
The regulator has processes which ensure that genuine claims are honored.  However, while purchasing, you have a responsibility to provide correct and true information. Withholding information or false information may lead to the claim being rejected. You also need to ensure that you contact details are correct and updated – for a smooth settlement of claims.

It is imperative that you inform your family/ beneficiary about your life insurance policy. Thanks to technology, policies can now be stored electronically, via electronic Insurance Accounts (eIA), which provide easy access and also eliminate the risk of physical damage or loss of the policy document.

What if I did not know whether I have a health condition?
At the time of offering the policy, the life insurer may ask you to undergo medical examination. The reports will be shared with you.

What if the insurer charges me a higher premium after medical tests?
All the more a reason why you should buy the policy, as your family needs the financial safety net.

Today, term plans are available online and can be purchased with ease. Every long-term financial plan needs a safety net which is provided by a term plan. Term insurance is all about financial protection – it is a must for every individual with responsibilities towards their loved ones.

Sandeep Batra is Executive Director at ICICI Prudential Life Insurance Company Limited.