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Business News/ Opinion / Make term insurance the first step
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Make term insurance the first step

Term insurance is the simplest form of life insurance

Jayachandran/MintPremium
Jayachandran/Mint

Humans are wired to do whatever it takes to protect their families from danger. While we do this naturally for physical risks, we seldom think about financial risks.

With the growing trend of nuclear families and aspirations to have a better lifestyle, one of the greatest needs of a working individual is to provide adequate financial support to the family and dependants in case of any unforeseen events. The questions to ask are: Am I actually prepared to face a financial emergency; and is my family protected financially?

Whether one is young and single with dependant parents or married with children, all of us save towards certain financial goals—needs of the family, paying loan instalments, planning for a house, investing for a child’s higher education, marriage, and many others. But all this planning can go awry if the provider were to be no more. It is for this very purpose that every individual must have some form of protection, and term insurance is the cheapest way to provide financial protection to the family, irrespective of what happens to the earning member.

Term insurance is the simplest form of life insurance. It offers a benefit payment on the death of the person insured. In these type of plans, the policyholder pays premiums, and in return, the life insurer pays a pre-defined amount to the policyholder’s nominee in the event of death during the tenor of the policy.

Why should this be the first insurance policy one buys? In a joint family system, in case of any unforeseen events, the extended family steps in and provides support. But nuclear families don’t have this umbrella of protection. When we are young, we tend to believe that we will always be there for our families. Yet, we increasingly see examples of people leaving behind families inadequately provided for.

While a term insurance plan cannot fill the void left behind by the provider, it seeks to address the financial consequences of the loss. And this protection can be purchased for a reasonably small annual outlay.

The sooner you buy insurance, the better it is. When we start working, our natural inclination is to “consume". We seldom think about protecting ourselves financially. We usually start thinking about it only after we start our family or when we take on liabilities. We often do not recognize the fact that it is cheapest to buy protection when we are young, even if we do not have liabilities or are yet to start a family. It is optimal to start on the protection journey as soon as we start earning. The amount of cover can be increased as life stages change.

We need protection for two key reasons: to cover our liabilities and to secure future income. Most of us have aspirations to buy assets such as a home or a vehicle, and often take loans to do so. It is important that we think about protection at such times. Leave behind a home, not a home loan: this aptly captures the need to cover liabilities.

When we are around, we have the ability to earn and provide for our family. But when we are not around, our family needs the same financial stability. This can best be achieved by buying a term plan to cover our future income. As a rule of thumb, a young person should typically purchase a term cover of 20-30 times her annual income. A person in her 40s should have cover 10-20 times the income and a person in her fifties, a cover of 5-10 times the income. As we get closer to retirement, the need for life cover reduces. The ideal duration of the policy should be until the retirement age.

When the objective is to ensure protection for the family, it is imperative to disclose all relevant details to the life insurance company. This will ensure that the family gets the financial protection it needs without any hindrance.

It is also important to buy a life cover from an insurance company that you trust. After all, the time of the claim is the “moment of truth".

Should I discontinue my old policy and buy a cheaper new policy? As you grow older or your health conditions change, insurance becomes more expensive or sometimes not possible to get.

It is quite tempting to change the policy as we see cheaper products in the market. But it is also important to keep in mind that as we get older, the cost of buying life cover increases. Additionally, with the passage of time, our health conditions change. This could sometimes mean that life cover could be difficult to buy or in some cases may not be possible at all.

There are few products that can match up with the kind of cover that a term plan can provide, and at similar costs. Even more reason why a term plan should be the first step of financial planning.

Sandeep Batra is executive director, ICICI Prudential Life Insurance Co. Ltd.

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Published: 09 Oct 2014, 07:13 PM IST
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