A systematic investment plan or SIP is one of the superior means to invest in mutual funds. SIPs require the investor to invest an amount they can afford into a mutual fund scheme of their choice. Moreover, they are required to link their bank account to their SIP. The SIP amount is then debited on a monthly basis on the due date of the SIP.
What If You Missed Your SIP Payment?
One of the common concerns for investors is that what if their account balance becomes low or they are not able to pay for their SIP due to any reason? Well, if you too have been in the same situation, you are not alone. Remember, missing a SIP payment is extremely common. Insufficient balance in the bank account is one of the prime reasons that many investors forget to pay for their instalments. However, missing a SIP instalment is something you should not worry about. Your investments will continue in a case like such. Moreover, the fund house will also not charge a penalty for missing the payment.
What To Expect?
A SIP is an investment that may seem to come with the only drawback of an insufficient corpus due to a missed instalment. What many people do not know is that even if they have missed a SIP payment, they can put money into their bank account as their payment would easily be done as and when the next SIP date arrives. What’s best is that their investment won’t suffer due to a missed SIP instalment.
Things to Look Out for
Missing one or two SIP payments will not have any adverse reaction to your corpus. However, there are two things that you must keep in mind regarding your missing SIP payments. They are:
• If an investor missed their 3 consecutive SIP payments, their SIP investment is terminated by the mutual fund house.
• The bank may charge the investor a penalty at the time when the bank account is low and the investor misses out on a SIP payment. This is referred to as dishonouring the payment. A charge is involved in cases like such.
How You Can Avoid Missing Your SIP Payments
If you do not want to end up missing your SIP payments, here is what you can do:
• Keep track of your bank balance account. In case, your bank balance becomes low and you find it insufficient as per your SIP payment, try increasing the balance before the SIP due date arrives by depositing some amount to the bank account.
• If you know for a fact that you will not be able to pay the SIP payment due to an unavoidable financial obligation, you can go ahead and stop your SIP. Once you feel that your financial crunch is over, you can simply restart the payment. During the same, your earlier SIPs would continue growing if you do not redeem them.
• Pausing your SIP investment is also one of the options you can go with. Especially, if you are expecting heavy expenses as well as liquidity issues. Remember, any mutual fund houses will grant you the freedom to pause your SIP instalments for up to a certain number of instalments. The mutual fund house can also allow you to pause SIP instalments for up to a certain period after which they begin automatically. Keep in mind to check if the AMC provides the same option and pause your SIPs for a few months when you encounter a financial crunch.
Final Words
There is no need for you to be concerned if you have missed a few SIP instalments due to unavoidable circumstances. But, make sure you understand that this would not mean that you can miss out on paying many SIP instalments as it would end up affecting your corpus in a massive way.
It is highly advised to avoid missing the SIP instalment. Furthermore, cover up for the loss by making additional purchases in the scheme if you cannot avoid not missing your SIP payment.
Your parents keep urging you to start investing for your future needs. Then, there are regular newspaper, radio and television advertisements of companies asking you to opt for their investment products. Like many others, if you get motivated to start investing, remember to avoid a common oversight of ignoring adequate life insurance protection for family members before any investments. Just in case you are wondering why, you need to read on.
Why life insurance before investment A part of your regular pay is required to meet regular expenses such as groceries, rent or home loan EMIs, mobile services, children’s school fees and so on. What you save can typically be earmarked for imminent purchases like gadgets and future needs like children’s higher education and retirement. Now, imagine a situation where the regular income suddenly vanishes. This happens due to the sudden demise of the family’s major or only income earner. In such a situation, the only way to meet immediate needs is to dip into savings.
If the situation of low or no new source of regular family income continues, the family would need to liquidate investments for future needs. Since, the liquidation is typically done under duress this may have to be done at a loss. This is especially true for market-linked investments due to less-than-favourable market conditions or due to penal conditions for premature exits.
The most compelling argument in its favour of life insurance preceding any investment is that even the best performing investments typically can’t meet a family’s present and future needs on the demise of the major or only income earner. If a person, who expects to work till age 58, dies at age 28, the family needs adequate resources to replace the loss of income from 30 years of work life. Even the most outperforming investments can’t create that amount of financial resources. It is only a life insurance plan that provides adequate life insurance coverage that can help and fill the void. It is here that a term plan is ideal to have. If you are wondering why, here are some compelling reasons.
Term plan advantage Among life insurance plans, term plans typically provide the highest life insurance coverage at the most affordable premiums. This is useful in early work life where you need to both get a high level of protection and get started with investments, besides meeting regular expenses. Thanks to low premiums, that remain the same for the whole term that can stretch to 25-30 years, you have more savings at disposal for investments. This is especially so for investments providing high growth in the long term, especially equity and equity-oriented investments. This advantage continues to accrue to you even if you increase your life insurance coverage subsequently as your regular income and savings goes up.
When you have a term plan, in case of an unfortunate event, investments earmarked for long-term needs are secured. The protection from the term plan can be further enhanced by attaching riders for risks such as accident and critical illness for additional and affordable premiums.
Clearly, term plans not only protect your family in its hour of greatest need but also protect the investments that you diligently make over time for the future of your family members. They are like the car seatbelts. They protect the investments during your family’s financial journey. That’s why before you start your financial journey you need to belt up with a term plan.
Term insurance plans were introduced with a very basic structure – the plan will offer a sum assured upon the death of the policyholder, will provide coverage till 65 years and premiums can be paid in only the annual mode. However, it started getting more complex, when more and more insurers started offering online term life insurance plans. Today there are – limited pay plans, increasing cover plans, staggered payout plans, return of premium plans and dozens of combinations. While this profusion of choices is good, it is also becoming a problem for most of us to decide which plan to buy.
In this blog we will tell you about the most important variables to consider to make the process of choosing a term insurance plan.
And, here are the 5 things to consider when buying a term life insurance plan.
Number 1: Calculate how much term insurance coverage you need:
Your term life insurance coverage should broadly assess how much money your family would need if you were to meet with an untimely death. The best way to do this is to grab a piece of paper and start calculating the following.
• One, estimate your dependent family’s monthly expenses and multiply it with 150. The multiple of 150 factors in future inflation.
• Two, add your liabilities on the account of home loan, personal loan, credit card bills.
• Three, deduct all the liquid assets you already have in the form of FDs, stocks or mutual funds.
• Four, add your expenses planned on the account of important life goals that are likely to happen in the next 15 years. Like your children’s higher studies or their marriage.
• Five, add the retirement corpus that you would want to leave for your spouse on his or her retirement.
Number 2: Determine the tenure of your plan:
Once you know how much coverage you need, it is important to know till what age you would need it for. The tenure should not be too little as the policy might lapse before your financial obligations are completed. At the same time, the tenure should not be too long because the premium charged would be too high on the account of the higher tenure.
The right way to estimate the tenure of your term life insurance plan is to determine by what year your liquid net worth, i.e. the total investment you have in mutual funds, provident fund, stock, etc after subtracting your liabilities, will be more than your term life insurance cover that we have calculated in the earlier section.
The age at which these two numbers coincide should be the age till which you need coverage. Post that, your assets will be enough to take care of your family in your absence.
Number 3: Target the highest Peace-of-Mind per rupee premium:
Here, we use the term Peace-of-Mind rather than coverage per rupee of premium because consumers often value some key intangibles while making a decision.
For choosing a term plan, these factors could be the stability of the insurance provider or its reputation in the eyes of the policyholder. Term life insurance is a long-term contract, often running for 30 to 50 years. Hence, it is important for you to be happy with your decision about the insurance plan you have picked, which would be a combination of the premium you pay and your perception about your insurance provider.
Number 4: Choose your add-ons wisely:
Term life insurance plans offer riders at a reasonable cost which should be certainly considered by you even if they might not fit your requirement.
There are four major riders that are available:
• Additional cover for death due to accident:
In case you die due to an accident during the policy tenure, this amount would be paid to you in addition to the basic sum assured.
• Cover for critical illness:
A lump sum amount is paid to the policyholder on being diagnosed with one of the diseases which has been mentioned as a critical illness in the policy by the insurer.
• Waiver of premium on disability:
If the policyholder becomes permanently disabled during the policy tenure, the future premiums for the policy would be waived off.
• Waiver of premium on critical illness:
If the policyholder is diagnosed with one of the critical illnesses mentioned in the policy during the policy tenure, the future premiums for the policy would be waived off.
Of the four riders, two riders, i.e. waiver of premium on disability and waiver of premium on critical illness, come at a low premium. The rider for critical illness cover is the most expensive. Hence, you have to run sum research to find out if the additional benefits match up with the premium charged. And read the fine print of all the add-ons as they tend to be different for different insurance companies.
Number 5: Broadly look at the claim settlement ratio:
Claim settlement ratio usually attracts a lot of consumer attention. It indicates the efficiency at which the policies are settled by the insurance company. So when you see the 95 percent in the claim-settlement ratio column, it means 95 out of the 100 claims reported to the insurance company were settled.
However a word of caution here. The claim settlement ratio is merely an indication. If the claim settlement ratio of a company is more than 95 percent, then the company has been very efficient about settling claims. You really don’t need to go much deeper into it to see who has 99, or who has a 98.5 percent ratio. You should consider the claim settlement ratio as a filter rather than a key decision-making criteria.
Bottomline:
Term life insurance is a long term contract between you and your insurer, and it will benefit your family when you are not there. It is in your best interest to choose the right plan for your family by considering all the five factors discussed in the article.
Got a term plan for your family? Or may be you’re planning to take the term plan in a few days. If you are, good for you!. One of the biggest questions, every person considering term insurance has, is – “Should I take the cover for the maximum period?”. This is exactly what Chetan also asked on a forum.
Just like him, hundreds of investors have the same question over and over again, and we tell them, “Just take it only until you reach 60 years of age.”
And they happily ignore our suggestion; as if we are crazy, suggesting this to them. The “Insurance only till 60 years” looks kooky to them – kind of a “wrong deal” and they want to get “maximum benefit” out of the term plan. “The chances of my family receiving the claim amount is higher when I am covered for long” is the common thought process of every person who is in the mad rush of buying the highest possible tenure.
Trust us, that’s flawed thinking and we will explain why. More than a sermon, think of this article as a discussion, where we put some points in front of you and you reflect and ask yourself – “Does it really make sense? or not?” and then make your own decision. So here are those 5 reasons on – why you should not take Insurance till the age of 75 years or more
1. You don’t need it beyond your working life
You really need to ask yourself the question – “Why am I taking Life Insurance?” and the answer is – “Because right now, I don’t have enough net worth, which will help my family if I am gone” or in other words – “Because my family is financially dependent on me.”
For a person who is not earning and does not bring money home, his death will cause family only emotional loss; not financial loss. Hence, logically you need to cover yourself through a life insurance product, only for the time you are working and others are financially dependent on you.
2. You will have “probably” have enough wealth by the time you retire anyway
Stretching the 1st point, if you are taking life insurance cover until you are 70-75 years, will you really need it at that time? Do you really feel that you will have any reason to have a cover of 1 crore that time (after 30-40 years?) . I am sure (more confident than you), that you would have completed all your financial goals by that time, you will have your own home by that time and you will have done everything in your life by that time. You focus area at that old age will be very different than what you focus on right now.
To understand this point, you have to stop for a moment and go into 2040-50; when you are retired and close to the heaven’s door. Are your children really financially dependent on your income – which does not exist? Is your spouse dependent on your income? You must have already accumulated enough wealth by that time and you must be getting some income out of that. Your death has nothing to do with family cash flows at the time.
3. The premium factors in your tenure already
Most of the people who feel that they are smart enough to take term plan till 75 years, forget that on the other side is a professional business running for decades now. They have hired people who are 10 times smarter, who design products (they are called Actuaries) that generate large profits for companies and not investors. Life Insurance is a “for-profit” business. They design things, so that they earn profit. If a company allows you to take a plan that lasts until you turn 75, why have they done that? Why did they allow that to happen? The premiums they charge already factor in everything. You pay premiums to get that term plan, it does not come free!
4. You will live longer – and they already know that.
Like I said in my last point, companies are “for-profit” businesses. They will not issue you a policy if your chances of living beyond 75 is not high. If you are a healthy person, already earning well, have access to good health care, what are the chances you will live beyond 75 years of age? Extremely high, that’s what!
Look around you – Are people dying early on average? No, you see people living beyond 80-85 already and here we are talking about your future which is 30-40 years away, when the average life expectancy of an average person in India would be closer to 73-76 years anyway (as per projections by govt studies.)
Now just imagine this … Compared to the 1.25 billion people in our country, are you in top 25% or lower?
Which means that you have much much better prospects to live beyond 80-85 years. Which brings me to another point, that you should seriously worry about about your retirement planning a lot more than the less important question of insurance beyond 70-75 years.
Even when we do financial planning for our clients, we make sure that we plan for their retirement beyond 85 years and have them covered only till 60 yrs or even lower if they feel they will retire earlier. The important point to understand here is that, a life insurance coverage is just a support for your family in your early life when you are making money, your financial replacement, if you will. So when a life insurance company issues you a term plan until 75 years, it’s not you who are smart, but the company! They know, with a really high degree of probability, you will keep paying the premiums till 75 years.
It’s all chance. Yes, there will be people who will die before they reach 75 years of age and yes, their family will get a lot of money, but it really is just the game of chances … Companies make profits because of those who will live beyond 75 years and not by those who die before that.
5. The value of your sum assured is peanuts later
I hear it most of the time – “I am taking the term plan till 75 years, so that even if I die, my family will get the money. So, the higher the tenure, higher the chances of making money.” But they forget that by doing so, they are actually helping the insurance guys make profit, but lets say you die at 70 years. Celebrations! Your family will get that 1 crore, which at this moment sounds good, but will not be worth a lot that time.
Let me show you the mirror that lets you look into the future 🙂
Let’s say you are a 30 year old guy, and your monthly expenses are 40k per month. You say to yourself, “Let me take that term plan worth 1 crore so that in case, I die my family can get 1 crore which will provide them some good monthly income.”
It would be very good number if you die early in your life! . With each passing year that 1 crore will be worth less. If you die the next year of taking the term plan, the worth of that 1 crore is pretty much same, 1 crore. But if you die after 10 yrs, that 1 crore will be worth 50 lacs in today’s world. So getting 1 crore after 10 yrs is same as getting 50 lacs right now. Are you getting my point? The money you get in term plan is a constant number, not linked to inflation!
So imagine you have taken the term plan till 75 years and you die at 70 (after 40 yrs of taking the term plan), what is the worth of that same 1 crore at that time? Hold your breath! It’ll not more than 6-7 lacs assuming a inflation of 7% and even if inflation for next 40 yrs is a small 5%, it would not be worth 15 lacs today! . So when your family gets that 1 crore after 40 yrs, it’s kind of worthless. No one would be depending on that money anyway; it’s just a bonus on your children’s inheritance money!
Act like a real informed and smart investor
I have been seeing this madness for many months now and was constantly wondering why people are focusing so much on this small thing called “long tenure” in the term plan. I see investors abandoning one insurance company for another just because the other company is offering a term plan till 75 years.
You are allowing yourself to fall into a trap if you do this. If you have already taken the term plan till 75 years, do not worry … do not cancel it, just let it run it’s course. Stop paying premiums when you feel that your family can be taken care of, by the wealth you have generated. If you are planning to take a term plan right now, take it for as long as it takes you to retire, probably till 55 to 60 years, but not beyond that.
You often plan for your rainy days, your financial goals, your retirement, but forget to value what you really have, i.e., the present. You need to invest in your present in order to secure your future. This means that even if you are healthy today, you need to invest in a term insurance plan in order to ensure your family’s financial security in your absence. You don’t know what happens to you or your loved ones the next minute. There’s a possibility that your health deteriorates in the future or when you get old. Thus it’s good to buy a term plan now before it gets too expensive or you become uninsurable. Besides, here’s a list of reasons that shows why is it important to buy a term insurance plan irrespective of the state of your health.
Easy to understand
As compared to other life insurance plans, term plans are easy to understand. All you have to do is pay your premiums and get insurance coverage for the term period chosen by you.
Affordable
If your budget is tight, then it’s ideal to buy a term insurance plan as it costs less than other insurance plans. Moreover, term insurance is good for a person who has a low income but needs higher coverage.
Tax benefits
This is yet another significant benefit of buying a term insurance plan. Not only premiums paid for term insurance are less, but they are also eligible for tax benefits. You get to enjoy tax benefits on the premiums that you pay towards the term insurance plan as per Section 80C and Section 10D of the Income Tax Act, 1961. Tax benefits under the term insurance plan are as per prevailing tax laws that are subject to time to time amendments.
Lower premium rates
The premiums paid for term insurance plans are much less as compared to other plans. Therefore, buying a term plan is the best option for someone who gets a moderate income and is the only breadwinner in the family.
Spousal cover
You get the option to cover your partner under the same policy.
Financial security
It is important to have a term insurance plan if you are the only breadwinner in the family as a term plan offers coverage to your family if something unfortunate happens to you.
It offers financial coverage that takes care of your family’s financial liabilities in your absence. Thus, if you don’t want your family to compromise on their lifestyle in the future, then it’s good to buy a term insurance plan for your family.
Flexible premium payment option or term
A term insurance plan also gives you the flexibility to choose your premium payment option. Premium payments can be made either monthly or annually, depending on the choice of the policyholder. Also, you get the flexibility to choose your premium payment term that ranges from 5 years to 40 years.
Rider benefits
Term insurance plans also come with add-on coverage options if you want to enhance the coverage of your policy. You can easily get a rider by paying some additional cost along with the basic premium of the policy.
Whole life coverage
A term plan offers financial security for a longer period of time. You get the life coverage option of up to 80 years along with in-built death and terminal illness death benefits.
On the whole, investors need to know that term insurance plays a very important role in your financial planning.
If you are the only breadwinner of your family, then it becomes imperative to get a term insurance plan. A term insurance plan can render protection and coverage to your loved ones in case of any unexpected and unfortunate event.
Hence by buying term life insurance, you can secure your family financially that can help them in leading a protected and stable life even when you are not around.
Here are some of the benefits of purchasing term life insurance:
1. Complete life cover
One of the important benefits of term life insurance is that it extends complete life cover to the person taking the policy. These complete life cover extend overall protection, and the insured person will receive protection till 99 years of age or more.
Term plans can further assist in diminishing the monetary strain on the family members in case of the demise of the insured person.
2. Huge sum guaranteed with affordable premiums
A term insurance policy allows the highest sum assured. Furthermore, the best term insurance plans are the ones that charge the most affordable premium when compared with any other insurance policy. You must always keep in mind that the earlier you purchase term insurance, the less premium will be charged.
Hence, it is important to opt for a term plan at an early age to get added advantages like lower and affordable premiums.
3. Severe illness coverage
A person may get diagnosed with any severe disease at any phase in their life. Furthermore, the medication costs incurred towards these ailments could simply consume all the savings.
While term life insurance provides life coverage, a person can additionally select a severe illness coverage in form of an additional rider that can help you pay your medical expenses without fretting about your finances.
4. Extra rider benefits
Another advantage of term life insurance is that you can opt for additional rider perks that can further enhance your term plan. These supplementary rider advantages are easily obtainable and are granted by nearly every insurance firm in India. These rider benefits can be easily supplemented with your policy by paying a minimal extra premium.
5. Payout of the sum guaranteed
In case of the demise of the policyholder, the family members of the nominees will receive a guaranteed lump sum payment. The nominees further have the option of receiving the payment either in a lump sum or in fixed monthly installments.
These guaranteed payouts will assist the family members in taking care of their financial needs in a manageable way.
6. Return of premium
A term insurance policy does not render any maturity advantage. However, you can get a maturity advantage within the same policy if you have opted for a return of premium. You are required to pay a slightly higher premium that will be paid back to you if you outlive the policy maturity period. However, the price of the premium granted will not include any rider benefits or taxes.
7. Various mortality benefit payouts
You may have multiple liabilities and financial burdens like paying bills, EMI’s, and many more if you are the sole earning member in your family. So when something happens to you, then this entire burden is shifted towards your family. This is where term life insurance can be of utmost benefit.
It will play a significant role in uplifting the financial conditions of your family by providing them with either a lump sum payout or payouts in monthly installments so that they can manage all their money-related problems.
8. Income tax advantages
A term insurance policy further extends tax advantages falling under two different sections of the Income Tax Act. A person can get a tax benefit for the term life insurance policy premium paid under Section 80C of the Income Tax Act, 1961.
However, the amount of the paid premium shall not exceed Rs 1.5 lakhs. Furthermore, a maturity advantage in regards to Term Return of Premium (TROP) also gets exempted in certain term insurance policies under Section 10 (10D) of the Income Tax Act.
9. Maturity advantages
A conventional term life insurance policy solely extends mortality benefits to the person who took the policy as insurance coverage, and there are zero benefits offered on the maturity of the term plan.
However, nowadays, there are certain plans like a term Return of Premium (TROP) that renders multiple maturity advantages paid in the form of premium if the person who took the policy outlives the term period.
10. Accidental mortality benefit
Accidental Mortality Benefit means in case the insured person passes away due to an unfortunate event, the family gets double the amount than what they would have got in case of natural death. This is so because insurance companies understand that a sudden unfortunate incident can shuffle the entire life of their family.
Furthermore, the cost of medical treatments is also exorbitant if the person survives the accident. Thus, they contemplate that this huge sum of money can help in lessening the financial burden of the family.
Life insurers are expected to increase premiums for term plans as claims spiked during the Covid-19 pandemic.
Reinsurers are becoming stricter about underwriting and the documentation required from customers, said Vighnesh Shahane, managing director and chief executive of Ageas Federal Life Insurance. “It will not be so easy or cheap to get a term product in India.”
The quantum of the hike, he said, will vary depending on the insurer, the reinsurer, and the volume of business between the two.
The revenue and profit of listed life insurers tumbled in the quarter ended June as they set aside more provisions against anticipated claims from the deadlier second Covid-19 wave. ICICI Prudential Life Insurance Co. saw the biggest sequential decline in new business premium at 50%, followed by SBI Life Insurance Co. and HDFC Life Insurance Co.’s 46% and 43% fall, respectively.
The companies have yet to report their earnings for the quarter ended September.
Term plans are likely to turn costlier because of three mains reasons:
Risks Of Higher Penetration
Since the original target group for term or protection products was the affluent category with better medical facilities, a lower risk was associated with a lower premium, according to Prithvish Uppal, the analyst at IDBI Capital Ltd. But as penetration for protection products rose, lower-income groups susceptible to higher risk merit higher premium, he said.
Cheaper Than Developed Countries
While India has a lower life expectancy, pricing has been on a par with the developed nations where people live longer on an average, according to Uppal. Annual premiums in Hong Kong, with a life expectancy of 84 years, are around Rs 12,000, about the same in India where the mortality age is 69 years, he said.
Covid-Induced Expenditure
An upsurge in claims due to the pandemic, especially the second wave, prompted reinsurers to hike rates, according to Mohit Mangal, the analyst at Anand Rathi Financial Services Ltd. “In Q1 FY22, HDFC Life’s gross claims were Rs 1,600 crore and net claims were Rs 960 crore,” Mangal said. “Thus, the reinsurers had to bear the burden of Rs 640 crore.”
Premiums declined in the 10 years through 2019. But just prior to the pandemic, reinsurers—companies that provide financial protection to insurance firms—raised prices ranging between 15% and 40%, according to Uppal.
ICICI Prudential Life Insurance passed on the entire hike to customers in July 2020, Mangal said. Others didn’t.
“HDFC Life and SBI Life chose to retain some portion of this hike on their books while others, in a bid to expand their protection business, absorbed the entire hike,” Uppal said.
HDFC Life, SBI Life, and ICICI Prudential Life refused to respond to queries from BloombergQuint citing the silent period ahead of their earnings.
Shahane said insurers may take a decision “depending on their expectations and predictions of the future and how the pandemic is likely to play out”.
According to Uppal, the companies will pass on the increase in reinsurance costs based on their historic mortality experience and follow a cautious underwriting approach to avoid pandemic-related uncertainties.
“ICICI Prudential is most likely to continue passing on the entire hike to customers due to its management policy,” he said. “[But] HDFC Life and SBI Life may also follow suit, unlike in the past.”
Unlikely Gainer: LIC
As term plans of private insurers turn costlier, Uppal expects one company to gain: state-run Life Insurance Corp.
The hikes will narrow the pricing gap with LIC. Currently, private firms charge around Rs 10,000 to Rs 15,000 a year for a plan worth Rs 1 crore,while LIC which sells similar policies at Rs 20,000-25,000, Uppal said.
“LIC is most likely to benefit from the price hike as brand recognition will enable it to gain market share in the protection business.”
Uppal also expects volume growth in the third quarter before the reinsurers increase prices by December-end.
Got a term plan for your family? Or maybe you’re planning to take the term plan in a few days.
If you are, good for you! One of the biggest questions, every person considering term insurance has, is – “Should I take the cover for the maximum period?”.
We provides coverage up to 85 years of age. or 20 25 30 35 40 years. I am confused about which policy term is better to get maximum benefits?
Just like him, hundreds of investors have asked me this question over and over again, and I tell them, “Just take it only until you reach 60 years of age.”
And they happily ignore my suggestion; as if I am crazy, suggesting this to them. The “Insurance only till 60 years” looks kooky to them – kind of a “wrong deal” and they want to get “maximum benefit” out of the term plan.
“The chances of my family receiving the claim amount is higher when I am covered for long” is the common thought process of every person who is in the mad rush of buying the highest possible tenure.
Trust me, that’s flawed thinking and I will explain why today. More than a sermon, think of this article as a discussion, where I put some points in front of you and you reflect and ask yourself – “Does it make sense? or not?” and then make your own decision. So here are those 5 reasons– why you should not take Insurance till the age of 85 years or more
1. You don’t need it beyond your working life
You need to ask yourself the question – “Why am I taking Life Insurance?” and the answer is – “Because right now, I don’t have enough net worth, which will help my family if I am gone” or in other words – “Because my family is financially dependent on me.”
For a person who is not earning and does not bring money home, his death will cause family only emotional loss; not financial loss. Hence, logically you need to cover yourself through a life insurance product, only for the time you are working and others are financially dependent on you.
2. You will have “probably” have enough wealth by the time you retire anyway
Stretching the 1st point, if you are taking life insurance cover until you are 75-85 years, will you need it at that time? Do you feel that you will have any reason to have a cover of 1 crore that time (after 30-40 years)? I am sure (more confident than you), that you would have completed all your financial goals by that time, you will have your own home by that time and you will have done everything in your life by that time.
Your focus area at that old age will be very different than what you focus on right now.
To understand this point, you have to stop for a moment and go into 2040-50; when you are retired and close to heaven’s door.
Are your children financially dependent on your income – which does not exist? Is your spouse depend on your income? You must have already accumulated enough wealth by that time and you must be getting some income out of that.
Your death has nothing to do with family cash flows at the time.
3. The premium factors in your tenure already
Most of the people who feel that they are smart enough to take a term plan till 85 years, forget that on the other side is a professional business running for decades now.
They have hired people who are 10 times smarter, who design products (they are called Actuaries) that generate large profits for companies and not investors. Life Insurance is a “for-profit” business. They design things so that they earn profit.
If a company allows you to make a plan that lasts until you turn 85, why have they done that? Why did they allow that to happen? The premiums they charge already factor in everything. You pay premiums to get that term plan, it does not come free!
4. The value of your sum assured is peanuts later
I hear it most of the time – “I am taking the term plan till 85 years so that even if I die, my family will get the money. So, the higher the tenure, the higher the chances of making money.”
But they forget that by doing so, they are helping the insurance guys make a profit, but let’s say you die at 70 years. Celebrations! Your family will get that 1 crore, which at this moment sounds good, but will not be worth a lot that time.
Let me show you the mirror that lets you look into the future
Let’s say you are a 30-year-old guy, and your monthly expenses are 40k per month. You say to yourself, “Let me take that term plan worth 1 crore so that in case, I die my family can get 1 crore which will provide them some good monthly income.”
It would be a very good number if you die early in your life! With each passing year that 1 crore will be worthless. If you die the next year of taking the term plan, the worth of that 1 crore is pretty much the same, 1 crore.
But if you die after 10 yrs, that 1 crore will be worth 50 lacs in today’s world. So, getting 1 crore after 10 yrs is the same as getting 50 lacs right now. Are you getting my point? The money you get in the term plan is a constant number, not linked to inflation!
So, imagine you have taken the term plan till 85 years and you die at 70 (after 40 yrs of taking the term plan),
what is the worth of that same 1 crore at that time? Hold your breath! It’ll not more than 6-7 lacs assuming an inflation of 7% and even if inflation for the next 40 yrs is a small 5%, it would not be worth 15 lacs today! So, when your family gets that 1 crore after 40 yrs, it’s kind of worthless.
No one would be depending on that money anyway; it’s just a bonus on your children’s inheritance money!
Act like a real informed and smart investor
I have been seeing this madness for many months now and was constantly wondering why people are focusing so much on this small thing called “long tenure” in the term plan.
I see investors abandoning one insurance company for another just because the other company is offering a term plan for 75 years.
You are allowing yourself to fall into a trap if you do this. If you have already taken the term plan for 85 years, do not worry … do not cancel it, just let it run its course.
Stop paying premiums when you feel that your family can be taken care of, by the wealth you have generated.
If you are planning to take a term plan right now, take it for as long as it takes you to retire, probably till 55 to 60 years, but not beyond that.
Would be happy to hear your thoughts and your views on this topic! You have taken the term plan for very high tenure.
As we said at the start, most people think insurance is an unnecessary expense. The reason is that we feel confident about our future and our ability to tackle unseen circumstances.
But there is a huge difference between our perceived ability and reality. For instance, a few years of savings can vanish in case of a medical emergency.
1. Insurance ensures the family’s financial stability
No matter how much you have managed to save or what your monthly income is, an unexpected event can burn a huge hole in your pocket or can simply jeopardize your family’s financial future.
For example, if you do not have adequate life insurance, your family might have to go through financial hardship if you were to meet with an untimely death.
Though no amount of money can replace the loss of loved ones, having life insurance would save them from going through financial hardship.
Meanwhile, if you or your family do not have enough health insurance, then huge medical bills during any treatment can completely shake your finances.
So you must cover yourself, your family with an adequate amount of insurance.
2. Insurance brings peace of mind
The premium you pay to the insurance company is the price that guarantees that the insurance company will cover the damage in case of an unforeseen event.
And, that guarantee that your risk is covered brings peace of mind.
For example, let’s suppose you die an untimely death at a time when you still have several milestones to achieve like children’s education, their marriage, a retirement corpus for your spouse, etc.
Also, there is debt as a housing loan. Your untimely demise can put your family in a hand-to-mouth situation.
But, if you would have bought term insurance considering all these factors, your family would be able to sail through the hard times.
3. Insurance reduces stress during difficult times
No matter how hard you try to make your life better, an unforeseen event can completely turn things upside down, leaving you physically, emotionally, and financially strained.
Having adequate insurance helps in the sense that at least you don’t have to think about money during such a hard time, and can focus on recovery.
For example, suppose you or someone in your family had a heart attack and needs immediate hospitalization. Such treatments at good hospitals can cost lakhs.
So having health insurance in this case, saves you the worries and stress of arranging money.
With insurance in place, any financial stress will be taken care of, and you can focus on your recovery.
Conclusion:
Having insurance – life, health, and liability – is an essential part of financial planning. It can save you from financial hardship in case of any unforeseen circumstances.
However, the decision to buy insurance should be determined by three factors – requirement, the benefits you get from the policy, and your ability to pay the premium.
We are trying very hard to make savings which could come in handy as the economy of our nation India continues to steam ahead.
Effective financial planning is needed to consider your financial requirements and goals. People will always search for financial instruments which give them higher returns on investments.
Term Insurance Policies are a financial instrument that helps you to get the benefits of protection and tax benefit.
It helps the family to stay financially secured in case of the demise of the policyholder, therefore, buying a term insurance policy is an important instrument when one thinks about taking life insurance.
Online Purchase of term plans can be the first crucial step toward making a successful financial strategy. It offers you protection against the unknown and can be used as a supplement for retirement income.
Buy for the Right Reason
You need to analyze the need you want to take up term insurance. You need to remember that you are buying term insurance for a specific purpose that offers cover to your family in case of your demise.
Tax benefits can’t be the main reason for your decision to purchase Term Insurance. This policy funds your retirement and the education of your child. If you are buying this at a young age then it would cost you cheaper.
Deciding the Cover Amount
To arrive at the final sum of term insurance, customers need to estimate their annual income, salary, monthly expenses, current and future expenses like school fees, the mortgage to take care of the financial requirements of their family after their demise.
Tenure of Policy
The tenure of your life insurance policy needs to be Retirement Age minus the Current Age, if your current age is 35 years of age and you want to retire at the age of 60, policy tenure would be 25 years. Some plans offer high life insurance cover till the age of 75.
Additional Coverage & Benefits
Add-On is riders that you can take along with a base cover, some of them are critical illness rider, accidental death benefit rider, waiver of premium.
The benefits are available at a higher premium which is added to the base premium. We need to understand the importance and relevance of these riders so that a proper selection of the riders can be done.
Credentials of Life Insurance Company & Its Claim Expense
Before you finalize a life insurance policy, you would need to be completely assured of the credentials of your chosen life insurance company.
Factors which one should look at include Assets under Management and Solvency Ratio.
