Beware of these five myths around term insurance

Yashish Dahiya Policybazaar.com People always have varying opinions about everything and ‘term insurance’ is no different. It is one of the most misunderstood financial products in the market. Because of the standard thought process, the difference between what term insurance is in reality and what is being perceived has always been stark. Despite being the purest form of life insurance, the product has never been a popular one with people because of their sheer lack of understanding about the overall benefits it offers. In this article, we’ve debunked 5 popular term insurance myths to help you come at a decision:Myth 1: I don’t need term insurance because I am singleReality: This does not hold true! Even if you are single, you should have term life insurance for any debts you may have like home loans, auto loans, or even personal loans. After all, you do not want your family to pay off your debts in case of your sudden death. Also, if you are the sole bread-earner of your family, your dependents will need a source of sustenance after your death. You may, however, choose to steer clear of term plans as long as you do not have financial liabilities or dependents to take care of, and have sufficient funds to take care of any life-altering situations. Myth 2: I should be covered for my present incomeReality: The reality is you should be covered for your future income. A cover of present income won’t be sufficient for your family to sustain beyond a year. Here, how much cover you need is usually a function of what your liabilities are and what your income is. Term insurance runs on the concept of Human Life Value (HLV) which is an estimate of the financial value of your life. The cover you choose should be adequate to replace your current income (inflation adjusted) so that your family can continue to have the same lifestyle and cover any outstanding loans that you may have taken. Typically, your term insurance cover must be 15X of your income in case you are earning more than Rs 7 lakh per annum. Your contribution towards term plan must be 20X of your annual income if you are earning less than Rs 7 lakh. Myth 3: I cannot buy term insurance after 50 years Reality: There are term insurance plans that allow you to buy policy till the age of 65. In fact, insurance companies now offer term insurance plans that provide coverage up to the age of 85 yrs. So, yes! You can buy term plan after crossing 50 years mark. Having said that, I would not advise you to buy a term plan after 50, given that you would end up paying a higher premium (a 50 year old man will have to spend around Rs.30000 for Rs.1crore Sum Assured with 20 year tenure). You may, however, opt for it if you have financial liabilities and dependent family members to take care of.Myth 4: Term plans are expensiveReality: Term insurance is the least expensive way to purchase a substantial death benefit basis the cost per lakh which can be as low as Rs.61 per lakh for a 30 year old male. So basically, Rs.1 crore cover for 30 years would cost around Rs.8322 per annum (Bharti AXA Life – eProtect). Term plan is a pooled risk wherein premium is the cost one pays for pooling one’s own risk with that of others via an insurance company and includes the insured’s share of expected claims costs, admin expenses, etc.Myth 5: Term insurance is restricted to death benefitReality: Now, this depends on the insurance plan and add-on covers that you opt for. There are certain riders that can be bought along with a term plan for additional benefits. For instance, personal accident add-on cover provisions for risks associated with temporary or permanent disability, and a critical illness rider offers one-time lump sum amount towards loss of income due to critical illness. Apart from this, you can sign up for return of premium term plan that reimburses the entire premium amount paid by you, in case you survive the policy tenure. Needless to say, these plans cost more than regular term plans. Remember, term insurance is not for you. It is for your family and hence, you must look beyond what is in it for you when it comes to buying a term plan. As a policyholder, you must always have an investment objective in mind. That way, it would be easier for you to opt for the right plan.