The Magic of Term Life Insurance

Term life insurance is not just a great value proposition, but also the most important insurance to buy. To understand term lifes magic we need to step back and answer the fundamental question Why do you need life insurance in the first place? What is life insurance and why does it exist? Life insurance is meant to address the fundamental need of financial security for a family if the main wage earner dies prematurely. Dying early leaves the dependents of the deceased, vulnerable to the

vagaries of life. There is a loss of income and in many cases debts to pay. The future economic prospect of the dependents is severely impacted. There are also non-economic consequences of a premature death the emotional loss for example. However, insurance as an instrument addresses only the financial part of the loss. It cannot mitigate the emotional loss felt by the death of a family member. Insurance exists because of risks. If there are no risks, and events are certain, there is no need of insurance at all. On the other hand, only those risks that are uncertain are insurable. For instance, death is a risk and it is certain and hence there is no life insurance available for the event of death itself. It is only the timing of death that is uncertain and can be insured. Much too often life insurance is thought of as a means of getting good investment returns or tax benefits. While life insurance can meet these objectives these are peripheral to the primary purpose of protecting the family in case of the wage earners premature death. www.securenow.in

How to address the risk of premature death in the family? The crucial role of term insurance. A premature death impacts immediate dependents spouse, children, aged parents. Frequently the financial setback is so severe that it sets back the economic prospects by a decade or more. Often times, the impact is so severe that the family unit takes a generation to recover. No responsible person would like this to happen his/ her dependents. People would like to have a mechanism to take care of such eventualities. A responsible person would like to make sure that there is a compensation which takes care of the current lifestyles of the dependents for at least 10-15 years, if not more. This needs careful thinking and considered decision making. The most important decision is calculating the sum of money that will meet the familys needs. The next important decision is to select a plan which most efficiently delivers the amount. By efficiency we refer to the cost of the insurance. It is no use paying such a high premium for insuring the unknown future, that your present is adversely impacted. After all we are talking of an event which has a low probability of occurrence.

Term Life Insurance is the most efficient plan for addressing this need. It is a plan which insures against such eventualities without burning a big hole in your pocket. It is a pure insurance product. If you live through the policy term, you do not get back the premiums that you have paid. However, it offers a high leverage in the event of death as beneficiaries get a compensation which is far in excess of the premiums paid. In fact the difference is in orders of magnitude. There is no other instrument which offers such leverage. A word of caution before you rush off to buy a term insurance plan - you do not need term life insurance if you have no dependents, nobody else relies on you for financial support, and you expect the situation to be similar in the foreseeable future. Ideally, the plan should be bought by a person who is aged 50 years or less and for the maximum term available. Typically these plans apply up to the age of 65. Hence a 40 year old should go for a 25 years plan, a 35 year old for a 30 years plan, and so on. www.securenow.in What is the life cover required? The most important aspect of buying life insurance cover is not the premium to be paid, but the cover

that the insurance provides (expressed as the Sum Assured). There are different methods of estimating the cover. Some of these are described below: Cover estimated as a multiple of annual income The cover required depends on the number of years you want to provide for, the cost of living of your dependents, the expected inflation and the debts that you leave behind for them to service. This will vary for different individuals, but typically debt + 7 times the current annual expenditure is the minimum amount of insurance cover required. Depending on individual needs this amount can be higher by a factor of 2 to 3. Lets take a few examples to illustrate this. Consider a family with annual expenses of Rs 5 lakhs, which has a home loan of 25 lakhs and other debts of 5 lakhs. The minimum cover required works out to 65 lakhs. If we consider a more affluent household with annual expenses of Rs 10 lakhs, which has a home loan of 50 lakhs and other debts of 10 lakhs, the minimum cover required works out to 1.3 crore. The cover required is the extent to which a person chooses to provide for his or her family after death. However,

there is a price to pay the higher the cover the higher will be the premium amount. Hence, a person needs to balance the premium paying capacity with the need. Theoretically, a person can buy a cover which may be one fourth the amount calculated and save greatly on premium. However, this defeats the purpose of buying the insurance, because if the eventuality occurs, the family is really in trouble. Lets take a numerical example to illustrate this point further: Consider a 30 year old earning Rs ten lakh per year requiring an insurance cover of Rs 80 Lakh. The typical insurance options and corresponding premiums (approximately) will typically be as follows* (25 years term period is assumed)

* The above figures are approximate to illustrate the order of magnitude. The actual figures will vary depending on several factors, and will vary from company to company Given the annual income profile and the insurance needs, the only affordable insurance in the above example was term life insurance. The other two insurances are not affordable, for the person in the specific example. Opting for those options implies compromising with the cover (one can reduce the premium expenses at the expense of the sum assured). Notice, that a term endowment like solution could have been achieved more efficiently with a term insurance with a premium of 25,000 combined with a fixed deposit of 80,000 every year (at 9% pa interest). In reality, all the returns displayed by various endowment policies can be achieved more efficiently, by combining ordinary financial instruments with the term life policy. The term life policy ensures that the primary covered required is achieved without stretching your finances. www.securenow.in

The strong value proposition of Term Life Insurance We have gone through the rationale and objectives of insurance and our view is that term life insurance is not only a great value proposition, but truly the most important insurance to buy. This is because term life: Ensures the highest sum assured or death benefit of all life insurance products. Has the lowest costs thereby helping you have enough liquidity to save and invest at yourpace to address your wealth creation needs. When compared on a death benefit basis, term life is less than x % of the cost of typical unit link or traditional plans. Is eligible for tax benefits on the premium paid and on death. Premiums are covered by section 80 C and death benefit is tax exempt under section 10(10D). This is unlike unit link products where the maturity benefits are taxable if Premium is more that 20 % of the sum assured. The payment structure in term life is flexible. You can stop paying premiums at any time if your requirements change and you no longer need to cover. This is not possible in other insurance

products without paying a considerable surrender penalty. www.securenow.in How to go about buying Term Life Insurance? The various steps involved are Identify the risk cover required. This is the most important step. Compare the offerings of different Life Insurance companies. Compare on: Price Terms and Conditions Offered The claims handling record of the companies Service Track record of the companies (various independent surveys) SecureNow does this for you. Depending on your needs, we get the best term insurance policy for you from the panel of leading companies that we tie up with. As independent insurance brokers, we act on your behalf at the time of recommending the risk plan and do not keep the insurers interest ahead of yours. We continue to serve you till the settlement of the claim, if any.

Our role lies in finding as good a match as possible for your needs from among the competing insurance products on the market and, where necessary, stimulating insurers to modify their polices or to create new covers in order to meet your needs better.