Rajat, 34, an IT professional, has dependant wife and children. His annual salary of Rs 15 lakh is enough to support his family. His concern is that he is the only breadwinner, and in case of his untimely death his loved ones could be under tremendous financial stress. He is thinking of buying a term insurance cover to mitigate the risk.
However, given that there are more than 20 insurers offering a wide range of products and multiple investment options, Rajat is trying to zero down on a policy that would work best for him. There are traditional life insurance plans, term plans, money back plans, ULIPS, and whole life plan. And all of them offer tax benefits.
Keeping in mind, Rajat’s family and monetary background, a term insurance plan would be good in his financial portfolio. The main is reason is that term plans offers risk management cover at a cost-effective premium.
Let’s see why buying a term insurance plan would work in favour of Rajat and many people like him who want to secure the future of their family members:
To know why term insurance, it is better to understand what term insurance is.
Term life insurance is a type of life insurance plan that offers death cover to the insured persona for a specific tenure. The insurer pays the nominees the sum assured, in case of the death of the policyholder. Most of the plan pay in lump sum, but you can choose to get instalments also. However, it does not provide maturity benefits like money back, traditional, or ULIPs, but offer a higher compensation for a lesser premium
In addition to this, there are several reasons that make term insurance on of the most cos-effective and sought-after insurance plans. Here is a quick rundown:
1. Term Plans Offer Financial Security
Term insurance plan are a great means to secure the lives of your dependants and help them live their life and meet future goals in case of the death of the breadwinner of the family. With the increasing financial responsibilities, the sum assured should be revised from time to time like in every 5 years. For Rajat, a Rs 1 Crore term plan or more would be beneficial, that can be enhanced if he plans to have another child in future.
2. Selecting The Right Term Insurance Amount:
There is not fit to all formula. But the coverage amount should be enough to help your family meet their routine expenses, continue with the same lifestyle, children’s education, marriage, and other emergencies. And most importantly factor in the inflation while estimating an appropriate term insurance sum assured amount.
As a general thumb rule, it should be 10-20 times of your annual income. And your investment tenure should be based on your health and retirement age. So, if Rajat is 34, and he is going to retire at the age of 60 years, he can consider buying a 30-year term plan.
3. Term Plans Have More Affordable Premiums
Term insurance plans come at a very reasonable premium cost, which is approximately around 0.1 percent of the total sum assured. This low premium is offered to help the people afford an optimal coverage amount to ensure appropriate financial cover to their loved ones even when they are not around. In comparison to other traditional life plans such as endowment policies can have a higher premium. Let’s understand this with an example –
A 30-year-old with a term plan of Rs 50 lakh for a duration of 30 years would be paying a higher premium for endowment plans and lesser for a term plan:
|Annual term plan premium||Annual endowment plan premium|
|Rs 14, 747||More than a lakh|
The difference is surprisingly high.
4. Term Insurance With Return Of Premium (TROP)
Term Insurance with Return of Premium (TROP) helps in securing your premium amount upon surviving the policy term. It is pure life cover and the premium of TROP plans is usually 2-3 times higher than the a regular term plan.
For example, if Rajat buys a TROP plan for ten years, and he survives this period, then the life insurance company will pay him the premium that he has been paying for twenty years. This amount can be utilized for major future goals such as education of children, marriage, etc. However, in regular term plans the sum assured is paid to the dependants in case of the death of the policy holder.
5. Term Plan Offer Various Rider Benefits
The applicant can choose from different riders to enhance the policy coverage. All the riders are available at an affordable premium. Some Insurers provide TROP feature by paying an additional amount. Some of the other riders include accidental death cover, permanent and total disability cover, critical illness cover, child education cover, and the likewise.
6. Tax-saving Benefits On Term Insurance Premium
While the primary reason of purchasing a term insurance policy is financial benefits for your loved ones, you also get to avail tax-benefits on the premium paid.
Section 80C: Term Insurance premiums are eligible for tax deductions up to Rs 1.5 lacs. So, if you are wondering paying the premium is not worth it, you may think twice.
Section 10 (10D): The premium that you pay for term- life insurance plans can be claimed at the time of receiving the pay-outs. The entire amount can be claimed for tax exemption.
A term-life insurance policy should be a part of holistic financial plan. And if you cannot afford the higher premium of a life insurance plan, then term plans make the right choice, as they offer a high value of death benefit at lesser premium prices. A term life insurance policy is simple to understand and comes with tax-saving benefits. But before factoring in the benefits of a term plan, remember that the main objective of term insurance is protection and not investment. And a term insurance remains true to its objective of financial protection.