Where Term Insurance Scores
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WHERE TERM INSURANCE SCORES
Though often neglected, life insurance forms an important pillar of any sound financial plan. The perils of modern lifestyle, a northward bound cost-of-living index and medical exigencies that extract heavy financial toll all add up to underscore the importance of financial protection for the family. Many a times, we are simply not aware of these fundamental financial requirements which are inseparable from our lives. So what are these key financial risks we encounter? First is the risk of premature demise (risk of living too short) of the family breadwinner. This creates financial challenges for the dependents. This risk can be addressed by a combination of life insurance term plan and life insurance savings plans. While term plans best address the income replacement part, the savings plan takes care of varied financial needs -- best termed as dreams and aspirations. Second is the risk of living too long. In India, the average life expectancy at birth has increased from 50 years in the 1970s to 63.9 in 2000. (Source: Human Development Report, 2003). Males and females in India at age 60 today are expected to live beyond 75 years of age, meaning they have to provide for themselves for at least another 15 years. (Source: The Project Oasis Report). The need for personal pension plans for a comfortable retirement has never been more felt. This risk needs to be covered by every individual, irrespective of whether there are dependents or not. The correct answer to such a risk is a pension plan to accumulate corpus, preferably without a life cover for optimal corpus build up. The third risk is the risk of living post a major disease/ critical illness in which one might have to undergo expensive medical treatment for protracted periods of time. This is generally accompanied by a depletion of savings and often, depletion in income as well. This requires health insurance cover to ensure that savings for other needs of the family are not liquidated for the treatment. While every man/ woman with dependants wants his/ her family to have financial security, very few are able to plan for this. Additionally, very few people know or can work out the insurance they require. When they do look at options, they tend to go for the savings platform only, as their first encounter generally happens to be with a unit-linked life insurance plan, owing to the preponderance of these products in the market. In India, ulips are predominantly positioned as savings vehicles, with a tendency to suggest that they can double up as a risk mitigation instrument of the first kind of risk discussed previously. However, most people end up buying a ulip with a life cover, which is typically only five times of the annual premium amount. This results in a gap between the actual cover needed and the cover bought.
Often, investors do not explore the possibilities to fill this gap in life cover. Term insurance comes in exactly at this point. Term insurance plans are pure insurance protection plans, which not only protect the income-earning capacity of the individual, but also any existing liabilities of the life insured. Assets often act as security covers in the absence of adequate insurance. For example, in the event of death of the breadwinner, in the absence of insurance, the assets will be sold to meet any existing liabilities. To prevent such situations, it is better to insure at least to the extent of existing liabilities. When should you buy a term plan? The best time to go for a term insurance is when you are young and have entered into a phase of your life that will require for you to take care of dependants in the very near future. The premiums are much lower at younger ages and also because in the early stages of life, one enjoys good health. Any individual who starts a family must take adequate term protection cover in order to protect the family's financial interests. And how does one choose the right amount and type of life insurance for oneself? Although life insurance plans are designed to suit various needs of the clients, this may be the most badly-purchased financial product. Most people, unwilling to face the thought of uncertainty, never buy coverage at all or if they buy, it is mostly in-adequate. How much insurance do you need? Choosing the right amount of life insurance is no easy matter. Most life insurance advisors start with simple thumb rules to decide. The most common thumb rule is a multiple of your annual income as per your age (see table). One's financial goal for the family should be to enjoy the same living standards always, even if the primary income ceases due to unfortunate early death of the breadwinner. Lastly, just as one needs to choose the right plan to fulfill his/ her dreams and aspirations, one also need to choose a professional life insurance advisor who is adept at need-based selling. As per second habit in Steven Covey's The Seven Habits of Highly Effective People, one has to being with the end in mind. For a man with dependants and financial responsibilities, the only logical end in terms of his/ her financial planning can be: My family should continue to able to maintain it's current living standards under all circumstances. With this end in mind, one can create a clear, compelling vision of what your family is and where you want to go together. If you want to see your family achieve big in life, the first and foremost thing you need to do right away is to buy yourself an adequate term plan.
Though often neglected, life insurance forms an important pillar of any sound financial plan. The perils of modern lifestyle, a northward bound cost-of-living index and medical exigencies that extract heavy financial toll all add up to underscore the importance of financial protection for the family. Many a times, we are simply not aware of these fundamental financial requirements which are inseparable from our lives. So what are these key financial risks we encounter? First is the risk of premature demise (risk of living too short) of the family breadwinner. This creates financial challenges for the dependents. This risk can be addressed by a combination of life insurance term plan and life insurance savings plans. While term plans best address the income replacement part, the savings plan takes care of varied financial needs -- best termed as dreams and aspirations. Second is the risk of living too long. In India, the average life expectancy at birth has increased from 50 years in the 1970s to 63.9 in 2000. (Source: Human Development Report, 2003). Males and females in India at age 60 today are expected to live beyond 75 years of age, meaning they have to provide for themselves for at least another 15 years. (Source: The Project Oasis Report). The need for personal pension plans for a comfortable retirement has never been more felt. This risk needs to be covered by every individual, irrespective of whether there are dependents or not. The correct answer to such a risk is a pension plan to accumulate corpus, preferably without a life cover for optimal corpus build up. The third risk is the risk of living post a major disease/ critical illness in which one might have to undergo expensive medical treatment for protracted periods of time. This is generally accompanied by a depletion of savings and often, depletion in income as well. This requires health insurance cover to ensure that savings for other needs of the family are not liquidated for the treatment. While every man/ woman with dependants wants his/ her family to have financial security, very few are able to plan for this. Additionally, very few people know or can work out the insurance they require. When they do look at options, they tend to go for the savings platform only, as their first encounter generally happens to be with a unit-linked life insurance plan, owing to the preponderance of these products in the market. In India, ulips are predominantly positioned as savings vehicles, with a tendency to suggest that they can double up as a risk mitigation instrument of the first kind of risk discussed previously. However, most people end up buying a ulip with a life cover, which is typically only five times of the annual premium amount. This results in a gap between the actual cover needed and the cover bought.
Often, investors do not explore the possibilities to fill this gap in life cover. Term insurance comes in exactly at this point. Term insurance plans are pure insurance protection plans, which not only protect the income-earning capacity of the individual, but also any existing liabilities of the life insured. Assets often act as security covers in the absence of adequate insurance. For example, in the event of death of the breadwinner, in the absence of insurance, the assets will be sold to meet any existing liabilities. To prevent such situations, it is better to insure at least to the extent of existing liabilities. When should you buy a term plan? The best time to go for a term insurance is when you are young and have entered into a phase of your life that will require for you to take care of dependants in the very near future. The premiums are much lower at younger ages and also because in the early stages of life, one enjoys good health. Any individual who starts a family must take adequate term protection cover in order to protect the family's financial interests. And how does one choose the right amount and type of life insurance for oneself? Although life insurance plans are designed to suit various needs of the clients, this may be the most badly-purchased financial product. Most people, unwilling to face the thought of uncertainty, never buy coverage at all or if they buy, it is mostly in-adequate. How much insurance do you need? Choosing the right amount of life insurance is no easy matter. Most life insurance advisors start with simple thumb rules to decide. The most common thumb rule is a multiple of your annual income as per your age (see table). One's financial goal for the family should be to enjoy the same living standards always, even if the primary income ceases due to unfortunate early death of the breadwinner. Lastly, just as one needs to choose the right plan to fulfill his/ her dreams and aspirations, one also need to choose a professional life insurance advisor who is adept at need-based selling. As per second habit in Steven Covey's The Seven Habits of Highly Effective People, one has to being with the end in mind. For a man with dependants and financial responsibilities, the only logical end in terms of his/ her financial planning can be: My family should continue to able to maintain it's current living standards under all circumstances. With this end in mind, one can create a clear, compelling vision of what your family is and where you want to go together. If you want to see your family achieve big in life, the first and foremost thing you need to do right away is to buy yourself an adequate term plan.
