Anupam Roongta
A term Plan is the most efficient and cheapest way to secure your family. The awareness about term plans is rising in India, as individuals and families are increasingly choosing them over Unit Linked Insurance Plans (ULIPs) and other traditional plans.
You need a term insurance if you have dependents (spouse, children, and parents) and have huge liabilities (such as a home loan) and other financial responsibilities (children’s education and marriage).
But before you buy a term plan, use this six-point checklist.
How much cover do you need?
You might have been told: ‘take a term plan cover of 20-25 times of your annual income.’ There is a smarter way to do this.
Your liabilities can be divided into three major components:
-Yearly household expenses such as rent, monthly bills, grocery, fuel, health insurance premiums, school fees and vacations
-Children’s education and wedding
-Home loans or other big liabilities
For example:
-Let’s say your yearly expenses are Rs 10 lakh. Now to get Rs10 lakh per annum as passive income, assume that your spouse will put the insurance amount into fixed deposits. At 4 per cent rate of return (post taxes), you must have 10 lakh divided by four per cent which is equal to Rs 2.5 crore of FD.
-Education and wedding expenses for two children can be assumed at Rs.1.2 crore.
-Home loan and other liabilities of Rs 1 crore.
-Total: Rs 4.7 crore (2.5 + 1.2 +1)
-Existing funds (including FDs, stocks, gold, savings account etc.): Rs 40 lakh
-Term Plan cover: Rs.4.7 crore less Rs 40 lakh = Rs.4.3 crore
Till what age is it required?
Once you build a corpus, your children are independent and you don’t have any liabilities, the need for a term plan goes away.
But there are some attractive policies floating in the market wherein you are covered till 85/ 90/ 99 years of age. You might say “why not?” Having a cover till 99 years of age is like a sure-shot way to get money (as you do not expect to live this long).
Let’s look at some numbers: Say, Sharma takes a term plan of Rs 1 crore at the age of 30, and pays a premium of Rs 30,000 per annum:
-He dies at 65. That is, he paid 36 instalments and his family gets Rs 1 crore. Returns are 10.44 percent.
-He dies at 85. That is, he paid 56 instalments and his family gets Rs 1 crore. Returns are 5.4 percent.
-He dies at 99. That is, he paid 70 instalments and his family gets Rs.1 crore. Returns are 3.8 percent.
Does a return of 3 percent-5 percent excite you?
Payout options
There are cases wherein the nominee (usually the spouse) is not able to manage the huge sum of money that comes from the term plan. It may lead to wrong financial decisions. You may choose amongst the following options, depending on the nominee’s financial aptitude.
-Lump-sum: entire amount is credited
-Lump-sum with monthly income: a certain amount is credited on death and the remaining as monthly income over the next 10-15 years.
-Only income: the claim is paid out only as monthly income over a period of 10-15 years.
Riders
Do not choose the following riders. Take a standalone policy instead.
Critical illness: These riders are usually inferior to the standalone critical illness policies that cover more diseases and early-stage illnesses as well.
Accidental death benefit: This rider pays an additional sum in case of accidental death. A standalone accident cover includes partial and permanent total disability, apart from accident death. But, many term insurance riders cover only accidental death.
Accidental disability rider: You might think that this rider will solve the shortcoming of the above rider. But most disability riders cover permanent total disability only, whereas a standalone policy will provide comprehensive cover.
You may choose the following rider:
Waiver of premium on critical illness: Your premiums will be waived if you are diagnosed with a critical illness or are permanently disabled.
Automatically increasing cover
Your income, expenses, and liabilities will increase with your age. It is wise to increase your term cover over time. Automatic increasing of the cover option will upgrade your policy until a maximum cover limit, without any medical test and with no risk of the upgrade being rejected.
Married Women’s Property Act (MWP)
If there is no Will, the payout from the insurance company can be claimed by other family members (claiming themselves as legal heirs) or creditors (banks etc.
To avoid this possibility, purchase the policy under Married Women’s Property Act (MWP) Act. If you do not do this while taking the plan, it can never be taken later.
(The writer is a SEBI-registered research analyst at www.anupamroongta.com)
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