Few things in life are inevitable & nobody can escape them. Death is inevitable. It's uncertain as to when someone would leave the world. While thinking about investing money for long-term goals like child education or retirement, one forgets about a risk that might occur anytime without a prior notice: Risk of death.
We all earn money to spend on our family's present and future needs. Our families need love & care, however, they also need financial security. If there was a day where you were not around anymore, wouldn't that create a financial burden on your family?
We have discussed about the types of life insurance products offered in India here. We will be covering all that you need to know about term life insurance in a series of posts. In this current post, we are going to talk about who should buy a term life insurance & when the right time to buy it is.
Term life insurance is the cheapest way to insure your family's future so that they don't feel the financial burden even if you are not around.
Term insurance is the simplest form of life insurance that provides a fixed lump-sum amount to your family, in the unfortunate event that they lose you, during the policy term. It is an easy and convenient way to secure your family's future in case of untimely demise.
Who should buy term life insurance: One should consider following parameters to check if one should have a term life insurance:
1) If one is the sole earning member of a family on whom entire family finances are dependent: In this situation, your family will lose the financial support to maintain their day-to-day lifestyle. The policy should pay-off the amount required to maintain the lifestyle even when you are not around. Eg: Let's assume the monthly family expenses are Rs. 1,00,000 & the rate of interest on fixed deposit is 5% per annum then you should have a term life insurance of Rs. 2,00,00,000 just enough to maintain the lifestyle of your family. You can adjust this amount by considering taxes & inflation.
2) If one hasn't saved enough for future goals: Suppose one has planned regular investment for child education that will be redeemed in future, these regular investments would stop in case of early demise thereby hampering the main goal. A term life insurance of equivalent amount can be taken till the duration of this goal. It can be dropped once the goal is achieved.
Eg: Mr. A has planned for the child education of his son & he will be needing an amount of Rs. 50,00,000 after 15 years from now. He can take a term life insurance of Rs. 50,00,000 with the policy term of 15 years by paying regular premiums. If everything goes according to the plan, he will have a corpus of Rs. 50,00,000 from his investment to pay for his child education & policy will expire. In case of Mr. A demise before 15 years, the insurance company will pay Rs. 50,00,000 that will take care of his child education.
3) If one has a large outstanding loan: A large loan can chew into the investment corpus that was kept aside for retirement. Eg: Mr. B has an outstanding home loan of Rs. 75,00,000 against the house in which he currently resides. In case of Mr. B's demise, if the family is not able to pay the EMI of home loan, bank will have to right to sell the house property & recover the outstanding loan amount of Mr. B. This situation can leave the family homeless. However, if a term insurance is taken specifically to mitigate this risk for the duration of home loan, then it would save a lot of trouble as the amount received from claim settlement can be used to close the loan account.
When the right time to buy term life insurance is: Simple answer would be to buy it as soon as you either have dependents or long term financial goals or an outstanding loan. A person could be in a dilemma of how to time the buying of insurance policy as the premium is based on age and increases as the age increases. If you are planning to either have dependents or take a large loan in near future then it would be prudent to buy a term life insurance immediately as the premium would be lower than what it could be if you take it after a few years. Term insurance premiums increase by 5-7% each year. Also keep in mind that once your premium amount is fixed, it stays the same for the entire policy term.
Tip: Buy term insurance before your next birthday to save yourself from a higher premium.
CA Rohit J. Gyanchandani is Managing Director, Nandi Nivesh Private Limited, A Pune based Wealth Management Company.