Buy a term plan and secure your family
Alam Ali is a 30-year-old IT professional with three dependents, his wife and parents. The annual salary he earns is good enough to take care of the financial needs of his family, but still he is worried. This is because he is the only breadwinner in the family and his dependents will end up in a lot of financial stress in the case of his sudden demise. Hence, in order to reduce this risk, Alam is planning to get a life insurance.
Considering his family and his financial background, an insurance expert suggested Alam to take a term plan because it offers the most economical and cost-effective risk management coverage.
Term insurance refers to a life insurance plan in which the insured person makes payment of the premium at pre-determined regular intervals (annually, half-yearly, or quarterly) and the insurer agrees to make payment of the sum assured to the nominee or beneficiary in the case of the premature death of the insured during the term of the policy.
However, in case the insured survives the tenure of the policy, the term life insurance policy would not provide any maturity or survival benefits. But these days, the insurance providers are also offering term plans, which pay back a particular amount out of the total premium paid in case the policyholder ends up surviving the policy term.
Now, the question is, why should Alam select a term plan above other financial products.
Let us discuss the reasons why Alam or you, for that matter, should choose a term life cover.
Being highly flexible is one of the main advantages of term insurance. You can apply for a suitable plan either online or offline. Moreover, there are various online policies for which the insurance providers don’t insist on medical check-ups in case the cover amount is below or equal to a certain amount (as pre-determined by the insurance provider).
All you need to do is give a declaration while applying. Although Alam does not have the time to increase the sum assured during the process of renewal, he has the option to apply for a new loan according to his needs. Moreover, he also has the option to customize the term plan with optional add-ons without changing the simplicity of the plan for offering additional safety to his dependents.
Term insurance premium is lower as opposed to other insurance policies as there is no element of investment in sum assured. In Alam’s case, just by making payment of around 1% of his annual salary, he can get a good amount of sum assured.
When you opt for an insurance plan, the amount of commissions charged by agents and brokers are mentioned under the charges for premium allocation. This expense is recurring in nature. Every time Alam makes payment of his premium, a particular amount has to be paid to the agent or broker. This amount is different for different providers and for different plans.
In the case of some term insurance products, the brokerage can be as much as 30-40% of the initial premium paid. Thereafter, over a certain duration, the cost of brokerage decreases.
But, the brokerage element in the case of term insurance is the least, around 5-6%. And, if you opt for an online term plan, this cost can be zero.
In the case of the policy being active for ten years or more, the claim rejections are usually lower. Alam can buy a term life insurance policy from any insurance provider, but he should disclose about his health, financial status, and habits entirely in order to make sure the policy claim of his family is not rejected after his demise.
Term insurance comes with a host of add-ons or riders that offer extra benefits at low costs. Partial or permanent disability, accidental death, income benefits, critical illnesses, and waiver of premium are a few of the options available.
The riders that you should buy totally depends on your requirements. For instance, if someone is working on the floor in heavy industries, the partial and permanent disability or waiver of premium cover can be considered.
The insurance experts suggest that you must not invest in a rider just for the heck of it because you have to pay extra costs for these. The rates may differ from one company to another and hence, you have to go through the fine print carefully.
Term plans also called pure protection plans do not classify as an investment option. However, it is a means to financially safeguard the lives of the insured’s loved ones or dependents. It helps them in meeting their lifestyle requirements in the case of the unfortunate demise of the insured.
As the time goes by, the insurance coverage should be revised after a certain period of time in order to stay in alignment with the changing needs. As per the insurance expert, Alam should get his insurance plan revised upwards when he plans to have a kid.
If you consider the retirement age to be 60 years, ideally, the plan should continue for the entire duration until the time of retirement. For instance, Alam should purchase a term policy for a duration of 30 years, that is, 60 – 30 (Alam’s present age), for making sure that his family will have the financial cushion for fulfilling their financial obligations and requirements in the future in case he is nor around.
The Suitable Cover Amount
When it comes to the right amount, there is no particular answer as the suitable amount is a moving target. Based on the stage of life you are at, the target may vary, and at some point of time, you might come to a situation where you won’t need a life cover at all.
But, as per majority of the financial planners, the thumb rule is that taking inflation into consideration, the suitable cover must be ten times your yearly income. Keep in mind that an insufficient coverage defeats the actual purpose of getting the insurance. Also, you shouldn’t be over-insured.
The bottom line is that considering the uncertainties of life that include the not-very-safe streets we walk on or other lifestyle hazards, a term life insurance policy can keep you away from a lot of worries of securing your family members. Therefore, buy a term plan before buying any other financial tool.