Beginners guide to Term insurance

What’s the most important thing in your life?

9 out of 10 times, the answer is almost too obvious — “Family.” It could be your kids. It could be your parents. It could be your spouse. It could be anybody connected by blood. In fact, if I asked you, what would you do for the people you love? You’d probably say something like this — I’d give up my life to protect them.

But alas, giving up your life doesn’t aid them in any real sense.

Think about it.

If they are dependent on you in any meaningful way, then your passing would be detrimental to their cause — Who’s going to pay the EMI on the nice new house you just bought?

Your dad who’s just retired?
— That man barely has enough savings to cushion his own retirement plan.

Maybe your spouse who only recently quit their job to tend to the family?

— But he’s already under terrible financial duress. You want him to think about EMIs?

Or maybe you don’t have an EMI?
— Well, maybe. But you probably have dependents. And once you are out of the equation, they’ll have to make do without you.

It’s an uncomfortable thought. In fact, for most people, it’s unpalatable.

Because it’s extremely hard to confront reality without you in it. You’ve only known one version of the world and that version has you all over it. But one day that will change. And when that day comes, you will be forced to reconcile with the aftermath one way or another.

So the next time somebody asks you — What would you do for the people you love?

Tell them you’ll buy Term Insurance. It probably sounds silly. Maybe even juvenile. But the thing is, it’s not. It takes a certain amount of character and a fair bit of gumption to confront these uncomfortable truths — To plan for a life without you. And the fact that you’re reading this tells me — You are brave. That you care. So in a bid to uncomplicate matters, let me explain through a series of use cases, what term insurance means, how it works and some of the things that will make this complicated subject matter a lot easier for you.

Hopefully, this helps.

What is Term Insurance

Imagine a world where you could potentially buy a product that could replace you. Okay, not you precisely, because that would be a bit silly. But what if you had a replica version of yourself that could earn like you and make money like you. Wouldn’t you jump on that opportunity? Or maybe pay an annual fee just so you could hold on to this person? You probably would. And a term insurance product does just that. It is your financial replica and it comes alive when you die.

Let me explain. When you buy a term insurance product, you pay a small fee every year to protect your downside. And in the event of your passing, the insurance company pays out a large sum of money to your family or your loved ones. Think — 1 Crore or 5 Crore or even 10 Crore. Ideally, this money should replace you financially. It should support your family when you’re no longer the breadwinner. And unless you’ve deliberately misled your insurer whilst buying the policy, they will pay out the full amount the moment you die. Hell, even if you do mislead them, they have 3 years to uncover the fraud. If they don’t do it by then, they are mandated to pay out, no questions asked. So unless you commit suicide within one year of buying the policy or you died while committing a crime, your loved ones will get this money.

And while the base product is simple enough to understand, some key questions still remain and we will address that in the next section.

What is an ideal cover for your Term policy?

The first question should be obvious by now — How much money do you need to replace yourself financially?

It’s a tough question and let’s be honest — It is a bit subjective as well. But there are a few key things you have to remember here. For starters, your expenses. If your lifestyle demands a certain level of spending you will need to keep it up if you don’t want your absence to be felt. So if you’re spending 50,000 every month, your term insurance product should replace this income. And at that rate, you’re probably looking at a cover totalling 1 Crore. Let me explain why.

Think about what your family would do if they received this money. Assume they do the least sophisticated thing possible — which is probably the smartest thing to do as well.

Fixed Deposits!

At 6% annually, they will receive 6 lakhs each year. That should adequately compensate for your lost income. However with inflation, that 6 lakhs might start looking paltry very soon. So let’s try and beat inflation. Let’s assume the insurer pays you 2 Crores. That should get your family 12 lakhs each year. A pretty good sum overall and maybe good enough for the next 10 years. But what if you have a lot of financial obligations? Loans and that sort of stuff.

Then you should start looking at a higher cover. And while these are rough estimates, I hope you get where I am going with this. The final amount should generate enough cash flows for a reasonable amount of time to pay for all your family expenses (including EMIs) and also leave a little extra for your family. We will soon have a calculator up on Ditto. So keep an eye out for that.

What’s an ideal policy duration?

Remember. With a term insurance product, you keep paying your premiums until you die. Or the policy lapses. So there is an expiration date of sorts and it’s on you to decide how long you want to keep your policy. And you have to make this choice at the time of purchase. You can’t change it afterwards. So there’s a lot riding on this.

Once again, you are looking to replace yourself financially. But you are only doing it because — When you’re young, your family won’t have a lot of savings to fall back on. As you grow older, however, that changes. For instance, by 60, your kids will be all grown up. Your spouse will likely have a retirement fund to lean on and you won’t have many dependents to worry about.

So 60 could be a good place to start. But the insurance company knows something. The average life expectancy in India is about 70. So if you are intending to keep the policy beyond 70, know that your premiums will shoot up. Like a lot. And that means the sweet spot is somewhere between 60 and 70. Any number in that range should ideally serve you well.

And while this overview should help you understand term insurance, there are a few add-ons aka riders you can attach alongside the base policy to make sure your financial replacement is as robust as you. And the most useful rider of them all is a life stage benefit.

If you need help shortlisting a good term policy or if you want to talk about your cover amount, text us on Whatsapp.

How does a Life Stage Benefit help you?

Term insurance policies are extremely rigid. You can’t change your coverage once you sign the deal. If it was 1 Crore six years back, it will be 1 Crore until the policy expires. So if you buy a policy when you’re young, your cover might be wholly inadequate in the future — when you marry and you have kids.

Unless you opted for a life-stage benefit. In which case, the insurer will offer you the option to increase your cover by a certain amount during major life events. For instance, when you get married and you have kids. It’s this sort of flexibility that you need in a good term insurance policy. And so if you aren’t married yet, maybe you should consider this benefit.

If you think you will have more dependants in the future, opting for a life stage benefit is a no-brainer.

When the Insurer waives your premiums

Imagine one day, the doctors tell you that you will be confined to a wheelchair permanently. It’ll be devastating, I know. You will have to quit your job. You will have to figure out a way to make a living despite your condition and in the meantime, you will have to relook at your investments, prune your spending and maybe even drop your term insurance policy.

How are you going to pay 15,000 every year in premiums, eh?

That money could come in handy elsewhere. But what if it didn’t have to be this way? What if the insurer allowed you to keep the policy even without paying your premium.

See… Your condition is unique. You would have persisted with the policy if you hadn’t been disabled. So some insurers will allow you to opt for a waiver. That’s them telling you — Pay a small fee and you won’t have to worry about your premiums in the event you are disabled. You can still keep your policy!!!

And while the waiver I just described kicks in if you are permanently disabled, you could also opt for a waiver if you are diagnosed with a critical illness — like Cancer.

A waiver of premiums might not sound like much. But if you are permanently disabled or if you are forced to quit your job because of a critical illness, this benefit could be a lifesaver. So maybe you should actively consider both riders.

Extra cover if you die in an accident?

We have lax enforcement of traffic laws. We have terrible roads and poor street lights. We have reckless drivers and speeding motorists. And as a result, there’s a fatal accident in this country every 4 minutes.

And if you’re worried about this statistic maybe it makes sense to opt for an accidental cover. In which case, the insurer pays out an additional 1 Crore to the family on top of the term cover (2 Cr.) if you died in an accident. And while these numbers are for illustrative purposes only, you can see how it can add an extra layer of security for your dependents, no?

If you pay a little bit extra alongside your base premium, your family could get some extra money and some extra protection in the event you die from an accident. But having said that, you must never reduce your term cover just because you have some protection here. That is a bad idea.

How a Critical Illness Benefit can help you?

Critical illnesses like cancer are hard to deal with. Granted, your medical bills will be taken care of if you have an extremely comprehensive health insurance policy. But once diagnosed with a debilitating disease, you’ll be forced to take a break. You won’t be able to go to work. And your family will have to make do without your income.

But if you opt for a critical illness benefit, things won’t have to be this grim. In the event, you are diagnosed with a critical illness, the insurer will pay out a portion of your term cover in cash to help you tide this crisis. It could be 10 lakhs. It could be 50 lakhs. It could be 1 Crore. All you have to do is choose the amount when opting for the benefit and you can use this money to replace your lost income if you are ever diagnosed with a critical illness.

A critical illness rider will make your life so much easier. But remember — most policies will pay out the corpus from your sum insured. And your term cover will reduce by an equal amount.

If you need help shortlisting a good term policy or if you want to talk about your cover amount, text us on Whatsapp.

Should you opt for a Terminal Illness Benefit?

The last thing you want to do with a terminal illness is — give up. When the doctor says you’ve got 6 months to live, you don’t begin counting your days. Instead, you look for avenues to survive. You’d want to avail the best treatment in town. Maybe even go abroad. The only problem — It costs money. A lot of it.

And if you opt for a terminal illness benefit, maybe you’d have a recourse. See, some insurers will offer you the entire cover in cold hard cash the moment you’re diagnosed with a terminal illness. That’s them telling you — “You’re good as dead. So take the money.” And with the large lump sum amount, maybe you’ll have a chance to avail the best treatment doctors can offer you. And guess what? Even if you make it through and live past 6 months, the insurer won’t ask you to pay them back.

While this seems like a nice benefit to have, the likelihood of a doctor certifying a terminal illness and the insurer accepting the assessment isn’t all that high. So maybe you should consider this fact before opting for this particular rider.

Can you beat inflation with increasing Cover?

Term Insurance is weird. You pick a number — your total cover. The insurer promises to provide the said cover in case you die. And in return, you continue paying a premium every single year until that day comes. Or your paying term concludes. And while there is nothing peculiar about this arrangement in itself, think about the implications of your decision 15 years from now. A one crore cover might look paltry if you haven’t taken inflation into account.

Which is why most people decide on the sum insured assuming inflation will continue to make ground each year.

But what if you didn’t have to worry about all this while picking a cover. What if your sum insured grew by 5% or 10% each year? That would save you a whole lot of trouble. However, it would also mean your premiums will grow at the same rate each year. After all, there is no free lunch in this world. So if you are looking to buy a term policy with an increasing cover each year, remember your premiums will also grow in tandem.

You could opt for this benefit or you could simply do the calculation right now and pick a larger cover that will protect against inflation. It’s on you really.

Should you decrease your cover as you grow older?

Remember how I introduced term insurance as a product to replace you financially? Yeah, we need to revisit that. See, as you grow older, your dependents may no longer be as dependent on you as they once were. Your kids grow up. Your savings corpus increase in value. You will have enough money to cushion against any headwind. More importantly, your financial obligations will no longer look insurmountable.

Think about it. If you’re a young lady with a home loan, you have to worry about paying your EMI each month. And in the off chance, you pass away, the burden shifts — to your spouse or even worse, your kids. So obviously you need better protection. You need a higher cover. But once you are through with the EMIs and your kids start working, maybe you won’t need the same level of protection. Maybe replacing you financially won’t be that big of a challenge. So some insurance companies offer you the option of decreasing your cover as you grow older. And that obviously means you will have also have to pay lower premiums as your cover diminishes in value.

While this might be a feature some people would seek, it’s very hard to predict future financial obligations. So if you are opting for this rider, make sure you are doubly sure you won’t need a massive cover as you grow older.

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