Why are term insurance plans so important?


Financial security is often presented as a prerequisite for achieving any long-term goals. The truth is that achieving financial security is possible for anyone, but very few achieve it. It’s a difficult process because you not only need a comprehensive plan, but also be persistent until you succeed.

The absence of financial constraints is a sign that you are financially secure. You feel comfortable knowing that your financial situation allows you to respond more comfortably to all your requests. Additionally, it may involve the following situations:

• There are enough emergency funds in the bank.

• You have sufficient income to manage expenses.

• You have no debt.

But no situation is guaranteed to last forever. It is therefore crucial to make a wise financial choice to ensure the financial security of the family and to build a solid financial base for them in case you are no longer there.

A term insurance plan is one of the best ways to provide financial security for your family, especially if they depend on you. A term life insurance plan is a financial tool that will keep your family afloat in an emergency by providing financial security even when you’re not around.

Why are term plans an integral part of financial security?

A term insurance plan or policy, as the name suggests, is a type of life insurance plan that provides you with life coverage for a specific or predetermined duration. If started at a young age, it helps provide inexpensive financial security for you and your family. In the event of the tragic death of the policyholder, while the policy is still in effect, term insurance usually pays out a set amount called the death benefit.

The first and most obvious reason to buy term insurance is to create a sense of financial security for your loved ones in the event of an unforeseen tragedy.

How can term insurance plans benefit the policyholder?

• Low premiums – Depending on the terms of the policy, you may be eligible for a term insurance plan for a reasonable premium. Generally, a term plan is less expensive than other types of insurance. It only provides basic life insurance coverage; there are no additional features or cost saving components.

• Starting early has its advantages – Your age, policy length, and other health-related factors influence the premium you pay for a term plan. The premium will be lower if you buy a term plan when you are younger.

• Possibility to buy short term – A term plan can be purchased for as little as ten years. You can purchase a shorter plan if you have a personal or home loan. For example, if your mortgage term is 10 years, you can opt for the same insured amount for a 10-year term plan. This ensures that if you die while the loan is still outstanding, your nominees will be able to keep the house by paying off the debt.

• Predefined intervals – Some term plans offer increasing life coverage at predetermined intervals with an increase in coverage equal to a predetermined percentage. For this reason, the policyholder can increase the amount of life insurance coverage as his income and liabilities increase.

• Possibility to buy long term – Term insurance plans can be obtained for a long time. Although a term policy can usually be purchased until age 70, some insurance companies offer coverage up to age 75 or even the life of the policyholder.

• Premiums are fixed – Fixed premiums mean that once the insurance company accepts your policy for a particular premium, they will not be changed or adjusted for the duration of the policy. You can be sure that you will pay a fixed annual amount that will not change for that particular period of insurance.

• Options/amendments – Some term plans allow you to add riders such as critical illness rider, accidental death rider, etc. Riders are optional additional benefits and can be added for a small fee on top of the cost of the main insurance.

• Fiscal advantages – You can deduct up to Rs. 150,000 in premium per annum under Section 80C of the Income Tax Act 1961. Also, the death benefit paid to your nominee is exempt tax pursuant to Section 10 (10D) of the Income Tax Act 1961.

• Easy to buy – Buying term insurance is an easy process. Premiums for multiple term policies can be compared using an online term insurance calculator, allowing you to choose the one that best suits your needs. You can also purchase a term plan online in a few simple steps by going directly to the insurance company‘s website. Remember that buying term insurance online can sometimes be cheaper and faster than going through intermediaries.

What liabilities can term insurance plans protect against?

The majority of people’s financial portfolios consist of a few popular purchases. This includes buying a house, a car for convenience, and other daily life essentials. Additionally, if you have children or a dependent sibling, you can set up funds for their marriage and education.

People frequently use credit in one way or another to achieve these long-term aspirations. Examples are available loans, mortgage repayments, lines of credit, and even credit cards. You can plan for all these liabilities and account for their timely repayment by including term insurance plans in your portfolio.

In the tragic event of your untimely demise, your family and loved ones could suddenly be responsible for repaying those debts. But with a term plan, you can make sure those unpaid bills don’t weigh on your family. The death benefit of a term insurance plan guarantees them a large sum as financial assistance, which can considerably relieve them of these financial burdens.

How much coverage is needed?

The sum insured of a term insurance policy is generally calculated as follows:

Minimum sum insured = annual income x 10 times + loans/liabilities

It is advisable to opt for 15 to 20 times your annual salary if you can afford the premiums, which are relatively inexpensive for the coverage you receive. However, this is a generic method and you may want to use a more reliable method to get your ideal coverage amount. There are three methods to calculate the ideal life cover:

• Income replacement method – The basic principle of this method is quite simple; your life insurance must be sufficient to replace your current income in the event of your death. This value is calculated by multiplying the number of years of work you have left and your current annual income.

• Expenditure-based method – This method takes into account all necessary current and future expenses (daily expenses, debts, long-term goals) and subtracts existing investments or life insurance coverage. The derived value is the life coverage you need.

• Human Life Value (HLV) method – The HLV method takes into account a number of variables to calculate the optimal level of term insurance coverage required, including your income, expenses, liabilities, life goals, etc. This is a more accurate way to determine how much coverage you can purchase, as it also takes inflation into account.

Using a term insurance calculator, you can calculate the premiums for the desired coverage amount. Keep adding more coverage in case your income suddenly increases or your debts increase. Get a life insurance policy as soon as you can during your working years because premiums are inexpensive at a younger age and stay the same for the life of the policy.

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