Term insurance: Your first step in financial planning

Humans are wired to do whatever it takes to protect their families from risks and other perils. While we do this naturally for physical risks, we seldom think about how we can protect our families against financial hardships that could strike the family in case the earning member of the family were to be no more. Today, the nuclear families and aspirations to have a better lifestyle is the norm.

This gives rise to the question “Have I provided adequate financial protection to my family and dependents”? Whether one is young and single with dependent parents or married with children, one has certain financial obligations – tending to the needs of the family, paying EMIs, planning for the future dream home, investing for child’s higher education, marriage etc. All of us save towards these goals. However, all this planning can get disrupted if the earning member of the family were to be no more.

It is for this very purpose that every individual must have protection. Term insurance is the most cost effective way of providing financial protection to the family. Term insurance is the simplest form of life insurance. In this type of a plan the policyholder pays premiums and in return the life insurance company pays a pre-defined amount of money to the nominee in case of the demise of the policyholder during the tenure of the policy.

In a traditional joint family system, other members of the family stepped in case of any financial exigencies. However, since nuclear families is the order of the day, the probability of family members stepping in to provide financial support is low. When we are young, we normally believe that we will always be there for our families, yet with the typical lifestyle that we lead, stress, lack of exercise, poor diet and many others, we increasingly see examples of people around us leaving behind families inadequately provided for. No product can fill the void created by the loss of the breadwinner, a term plan can addresses the financial consequences due to this loss.

The sooner an individual buys a term plan the better it is. The only difference is the extent of life cover will vary as the age of the individual progresses. It is not advisable to purchase a term plan for individuals who are 60 years or above. Ideally, as soon as an individual starts earning a term plan should be bought and with increased responsibilities the life cover can be increased. Financial protection is primarily required for two reason – cover liabilities and secure future income. Every individual has aspirations of buying a home, motor vehicle etc. and usually avail of a loan to acquire these assets.

What happens if during this period the earning member is no more? Leave behind assets not liabilities is the sole motto for providing protection to secure our families. A term plan can provide financial stability to the family of the policyholder and this can best be achieved by buying a term plan to secure future income. As a thumb rule a young individual should purchase a term plan with a life cover of approximately 20 – 30 times the annual income. An individual in his forties a cover of 10 – 20 times is appropriate and for an individual in his fifties a life cover of 5 – 10 times should be sufficient. As we get closer to the retirement, the need for life cover reduces.

The ideal duration of the policy should be until the retirement age. Individuals should honestly disclose all relevant information to the life insurer. This is very important as it ensures that the nominee does not face any challenges at the time of settlement of the claim, you don’t want to get caught in a situation where the claim is denied, it will defeat the very purpose for which the policy was purchased. Term Insurance are offered by all life insurance companies and have different premium amounts, this could create a dilemma for an individual. Buying the cheapest of the most expensive term plan is not the answer. An individual should study the claims settlement ratio of the life insurer before purchasing the plan. In conclusion, it would be appropriate to say that a term plan is in a way the first step to building a financial plan. 

[source: http://www.moneycontrol.com/news/insurance/term-insurance-your-first-stepfinancial-planning_1223746.html]