The Long Read
Everything you *need to know* is right above this. Scroll down, only if you'd still like to read more (honestly, why?)
Yes, of course!
As you reach various life milestones, you will have more financial responsibilities like child’s education, home loan repayment, healthcare expenses, elderly care and so on. You may find more and more people depending on your income, partly or entirely. Of course, you have goal-oriented investment plans but you need to be alive to grow your wealth. What happens to your loved ones, when you pass away unexpectedly, especially if you are the sole breadwinner?
Term insurance is that financial safety net, that backup plan to your financial plan which comes in handy when something goes wrong. It helps your family with their regular expenses and also with big future expenses, even when you are no more.
See, the future is uncertain. Even if you don’t know whether you’ll have any major future expenses, your circumstances are likely to change with time.
Right now, your parents are probably still working. You are most likely to be single without many financial responsibilities.
But a few years down the line, you may be married with a child on the way. You may have quite a few loans to pay off.
After some more years, you will find that it’s time to fund your child’s higher education or even wedding. And what about your spouse’s travel bucket list? That needs to be prioritised too.
Even if you’re planning to stay single, you may still have parents or siblings depending on your income.
That’s why you should buy term insurance so that you can safeguard their future in the event of your untimely death.
And the best time to buy a term plan is while you are young because you can save on premiums.
The more you delay, the higher your premiums will become.
And the best part? By buying a term plan early you can even lock in a cheaper premium i.e. your premiums will remain unchanged throughout the entire policy duration, provided your life cover or policy benefits remain unchanged.
Yes, it can. If you pass away during the policy duration, your nominee gets your term insurance life cover. They can use the policy money to repay the home loan and any other outstanding debts.
This is why it’s important to buy term insurance to help your family pay off all debts in your absence.
Of course. If you pass away, you won’t be around to fund your child’s education abroad and your term insurance payout can be used by your nominees to help them pay it.
You can make your spouse, parents or siblings your nominee so that they can use your life cover to fund your child’s education.
In that case, they need to be accompanied by an appointee who must be above 18 years and can be a family member, friend or anyone you trust. If you pass away your appointee will receive the life cover on your child’s behalf. They can use it for your child’s benefit such as an education abroad. Or they can pass it on to them when they turn 18.
Long story short, if you are planning to have children, it’s imperative you buy a term insurance plan to secure their future.
Before we answer this question, you need to know about the different modes of term insurance payouts available:
Your family or nominees can receive the term insurance payout in the following ways:
Lump sum - The entire life cover gets paid to your nominee in one go. This would be the best option if your nominee has a huge loan or debt to take care of or needs to make a one-time large payment. However, choose this option only if your nominee is well equipped to manage such a huge sum of money.
Lump sum + Fixed monthly - Your nominee receives a chunk of the payout now and the rest in fixed monthly instalments. This would work if your nominee has small loans to repay or needs to make a one-time payment, post which they want fixed monthly income.
Lump sum + Increasing monthly instalments - Your nominee receives a chunk of the payout now and the rest in monthly instalments that increase every year. This option is for someone who has small loans to repay or needs to make a one-time payment, and wants monthly income that increases with inflation thereafter.
Monthly income - Your nominee receives the payout as monthly income for years. This option works best if you want to provide your nominee with a steady income to meet their expenses, but feel they cannot manage a large amount of money or can get easily swindled.
You should assess your family’s financial requirements and money management skills before deciding how they should receive your life cover:
If they have big loans or debts to clear off or they need to make a one-time payment immediately after your demise, you can opt for lump sum life cover payout. Make sure your family has smart money management skills because it’s quite a large amount to handle.
If they need to repay small loans or make a one-time payment, post which they need fixed monthly income, consider choosing the lump sum + fixed monthly payments.
If they need to repay small loans or make a one-time payment, post which post which they need a monthly income that increases with inflation, consider choosing the lump sum + increasing monthly payments.
If you feel your nominee cannot manage a large amount of money or can get easily swindled, then opt for the monthly payments option.
Yes, you can. There is an act called the ‘Married Women Property Act’ or MWPA which ensures only your wife and children will get your term insurance policy payout.
This means, even your close relatives, creditors or anyone else cannot lay claim to the payout. Your life cover can’t even be included in your Will because MWPA overrides a Will.
To buy a term plan under MWPA, select ‘yes’ for the question ‘I would like to buy this policy under the Married Women's Property Act (1874)’ in your application form.
Good question. Since your term plan is a replacement of the income you’d have earned if you were around, the amount will also depend on your income and of course your policy duration.
Here’s a simple formula to calculate the life cover you should get for your family:
*It is the pre-tax annual income that you earn by actively working, aka the income that’ll stop coming in if you’re not around. It includes your salary and business income but not any rental income, interest, and dividend.
Let’s take a small example to understand it better.
Suppose you earn ₹ 6 lakhs every year (it’s your total current annual income) and you plan to stay covered for a period of 20 years. Your life cover should be 20 x ₹ 6 lakhs = ₹ 1.2 crore.
Simple. You should stay covered only till you retire or till you have people dependent on your caregiving.
See, you want your term plan to make up for the loss of your income and help your family with big future expenses in your absence.
By the time you retire, you are likely to have met these expenses and fulfilled other financial responsibilities too. Your family may no longer be dependent on your income anymore.
So, there’s no need to stay covered beyond your retirement. You will end up paying a higher premium if you do that.
And even if you pass away, by the time your family receives your life cover, its value will be reduced thanks to inflation. You’re better off investing that additional money in an FD or mutual fund.
No, your term insurance policy payout is not taxable. All the more reason for you to buy term insurance to leave your family with a life cover that can meet their lifestyle needs, in the event of your unexpected demise.
Yes, you can buy more than one term plan to ensure payouts from all the plans are sufficient to help your family financially after your unexpected demise. But factors like your income, age, and others will determine your eligible coverage.
If you want to buy multiple term plans, you need to disclose to your insurer about any existing term plan you may have. And remember, the insurer will assess your overall risk and based on that, there will be an upper limit beyond which you won’t be able to exceed your cover.
But having said this, it is still advisable to get one policy that meets all your life insurance needs. Why? Because your nominees will have to initiate the claim processes separately for all the policies if the need arises.
For example: If a person needs a life cover of ₹ 1 crore, they can buy one policy with ₹ 1 crore cover. Or they could buy 5 policies with ₹ 20 lakh cover or 10 policies with ₹ 10 lakh cover and so on. But this would mean that their family will have to file as many claims. Why have the hassle of multiple policies when 1 policy does the job?
See, having multiple policies does not mean that you will reduce the chances of not getting a claim. If one insurer rejects your term insurance claim, chances are that other insurers will do the same too.
So don’t think of having multiple policies just for reducing the chance of claim denial. Instead, avoid actions that may lead to such rejections.
Simple. Term insurance provides a financial safety net to your family in case you pass away. The payout that your loved ones get can be used to overcome any financial difficulties that may arise due to your sudden demise.
Don’t confuse term insurance with investment. Its purpose is to protect your family in your absence. And it gives you an immense peace of mind knowing your loved ones will be financially secure even if you are no more. Result? You get to live life relatively worry-free and on your own terms.
Term insurance is not all expensive. That’s just a myth.
In fact, it is one of the most affordable ways to financially protect your family in your absence.
For example, you can get a term policy of ₹ 1 crore* life cover for as low as around ₹ 500* per month.
(*numbers are indicative)
The earlier you buy, the cheaper your term insurance plan is going to be.
And as for investment, well it’s a good idea to build a nest egg through goal-oriented investments. But you can’t rely entirely on that to protect your family.
You need to be alive to grow your investments which are most likely to give returns only in the long run. If you pass away before your investments mature, your family will face a massive financial crisis. You also have to take into account the impact of inflation on your investments.
Term insurance will provide them with a financial safety net in your absence and will help them meet all their expenses.
So keep investing but do include term insurance in your financial plan as a backup.