Buying a Term Insurance in layman terms – Is “investing” in securing your loved one’s future and ensuring that your family’s financial needs are met even when you are not around i.e. after one’s demise. It does not provide return at regular intervals. It doesn’t even provide any amount on maturity. The Nominee gets paid on the death of the policy holder.
Well then can you call Term Insurance as an Investment? Or It is just an Expense? You may ask.
Most of the people think – Why pay Rs.11000 per year for a cover of Rs.1Cr for 30 year old person for a 85 year policy. Rather not invest same amount in a fixed deposit or a recurring deposit? They believe that Term Insurance is just an expense. It doesn’t make sense to buy one.
Let me explain you the thought process with an example –
Mr.Victor ,30 years old person has bought the policy for 85 years coverage which means policy term – 55 years. And will pay Rs.11000 every year as premium for next 55 years.
At the same time Mr. Victor also invest – Rs.11000 every year in Fixed Deposit @8%p.a. (Pre-tax) Interest for the next 55 years.
|Term Insurance – 30 year old person||Fixed Deposit – Invested for 55 years|
|85 Years Policy||Invest Rs.11000 Every Year|
|Policy Period – 55 years||@8% p.a (Pre-tax) Interest|
|Premium Paid – 11000 per year||At the End of 55 years – Rs.41,39,079 post-tax|
|Coverage – Rs.1crore|
|Total premium paid – Rs.5,50,000 in 55 years|
After comparing both the scenarios,
Mr. Victor will receive from Fixed Deposit Rs.41,39,079 post tax kept @8p.a. (Pre-tax) interest rate at the end of 55 years .
And If something happens to Victor, at any point of time after making payment of first premium of Rs.11000 to Term Insurance company. His Family gets paid Rs.1Crore as Lumpsum payment which is Tax-Free.
Even if you compare at the end of 55 years – Victor has got Rs.58,60,921 more than Fixed Deposit which is totally tax free.
Well after going through the example, it feels Term Insurance is definitely a great Investment plus it is also a risk cover for your family right after day one of the first premium paid.
Even now if you feel Term Insurance is not a great Investment & a question comes to your mind what if life expectancy of a person is more than 85 years? Then is Term Insurance a good investment?
Let me explain you another example
Mrs. A , a 53 year old woman buys term Insurance for 99 years for Rs. 50 lacs coverage by agreeing to pay a premium of Rs.48865 for the next 20 years.
- At the same time, let us assume Mrs B invests Rs.48865 every year for next 20 years in a Fixed Deposit @8p.a pre-tax interest.
|Term Insurance – 53 year old female||Fixed Deposit – Invested for 45 years|
|99 Years Policy||Invest Rs.48865 Every Year|
|Policy Period – 46 years||@8% p.a (pre-tax) Interest|
|Premium Paid – 48865 per year for 20 years||At the End of 41 years – Rs.50 lacs post-tax|
|Coverage – Rs.50 lacs||At the Age of 94 years – She receives Rs.50Lacs|
|Total Premium paid in 20 years – Rs.977300|
After Comparison between them.
In fixed deposit – Mrs. B gets Rs.50 lacs post tax after 41 years i.e at the age of 94 years by keeping the amount @8p.a pre-tax.
It is found that Mrs. A has paid a total premium of Rs.977300 in 20 years starting from today. And gets a policy of 99 years which gives a 100% guarantee of return of amount invested, assuming life expectancy is less than 99 years.
Her family will be paid Rs.50 lacs from day 1 of first premium paid if anything happens to her.
Well after going through second example, you will be convinced that Term Insurance definitely is a great investment. It provides risk cover with great returns on investment in comparison to Fixed Deposit.
Next questions arises ,Is all types of death covered in Term Insurance?
Yes, Term Insurance covers Natural, Accidental death or death due to some illness.
Are there any other benefits of term insurance?
- Tax Benefit –
The Premium paid for Term Insurance is eligible for deduction under section 80C. You can get maximum benefit of Rs.1,50,000 every year on the premium paid.
- Peace of Mind –
The Person who buys term insurance feels relaxed. Even if there are any unpaid loans or any amount of debt which remains outstanding to be paid. It shall be paid with the help of Lumpsum amount paid to your family once you are not there. And your family is able to maintain the same standard of living. The person quality of life improves with better peace of mind.
- Protection against Business Loss –
It can used to protect against untimely demise of any key man i.e. important person in the business and thereby serve as protection against business loss. Keyman Insurance – It is best way a business can protect against an unforceable loss by paying a small amount of premium for the Insurance. It also can be used as a tax Deduction shown as business expense.
For Eg. You Plan to make a Film with an Actor. And you take a Term Insurance for Actor’s life. If anything happens to him while making the film. Your business is secured with lumpsum amount paid to you & serves as a safety cushion. Same applies to Directors in Companies.
- Welfare measure to Employees –
Term Insurance can be bought by an employer for his employees and it can used as a welfare measure for its employees. It can also be treated as a business expense useful for tax deduction.
Once you have decided it is beneficial to buy a Term Insurance. A question arises when to buy a term insurance?
- Buying Early is Better-
The Premium for term insurance increases as you get older. It is better to buy it when you are young and healthy. As the first premium paid remains fixed and you need to pay the same amount of premium every year. It makes sense to buy Term Insurance as early as possible at any age when you starting earning money. A person can buy Term Insurance maximum till the age of 65 years. As you get older, you are more prone to medical conditions. And even though the sum assured in the coverage remains the same, the premium will increase once you get older.
- How much amount of policy one should buy a term insurance for?
Mainly the policy amount should meet you family’s expenses, in case of unfortunate event takes place and you are not there to meet the same. The Thumb Rule states – “10 Times of the Gross Income Earned” . It should be the minimum amount of Policy for Term Insurance you should opt for.
Any important points to be kept in mind while buying Term Insurance?
- Nomination Form –
One should never leave the nomination form to be filled up for later. Even inform the nominees about the insurance policy and where the documents are kept.
- Benefit of MWP, Act ,1874 –
If you are heavily debted or even afraid in future there can be any liability which can arise on you. It is better to endorse the policy under the Married Women’s Property Act, 1874(MWP). So that the intended beneficiaries i.e. Wife and Children gets the amount without any interference from the court of law, banks, NBFC,etc. You can take benefit of MWP Act, 1874 and safeguard your family against any unexpected contingency in future. For Eg. If you are Director of a company, afraid of any contingent liability that may arise in future. Then it makes sense for you to endorse the policy under MWP Act, 1874.
- Policy Period –
Person can buy a policy for 99 years, 85 years, 75 years or any specific period. As person considers the life expectancy. Usually the idea to buy a term insurance is as a risk cover, so that your family is able to maintain the same lifestyle even if you are not around. In that case, 75 -85 years is a good enough period for which you can buy a Term Insurance. As once you are between the age of 75-85 years, you will be able to build enough safety cushion for your family.
- For Females is Premium lesser as compared to Males?
Yes, term insurance premium is less for females as compared to males for same sum assured even if both are of same age. As life expectancy of females are usually considered higher.
- Mutiple Premium Payment options –
While choosing amount of Premiums to be paid for your Sum Assured i.e. coverage of your policy, there are multiple premium options to choose from- example – Pay Premium only for 5 years, 10 years, 15 years, 20 years, 25 years, 30 years, Regularly pay premium every year. You need to calculate which is option suits you best as per your financial capability.
How to Select which Term Insurance company to buy from?
- Solvency Ratio – One Should opt for the company with higher solvency ratio. IRDA requires all life insurance companies to maintain minimum Solvency ratio of 150%. Higher the Solvency ratio, better the company capability to pay your lumpsum amount in future.
- Claim Settlement Ratio – One should look for companies with high claim settlement ratio. Higher the claim settlement ratio better the reputation of the company in honoring the claims when the application is lodged with them for same.
It is better to contact an Insurance Advisor for best suggestion for a term insurane. Considering the complexities involved in calculation of premium which serves best for you. Even suggesting which company has best Claim Settlement ratio, Solvency ratio, etc.
For more details on Buying or understanding Term insurance feel free to reach us on email@example.com or call us on 08779396560.