Term Insurance, to say in the simple terms, to secure your family or beneficiary after your death in a particular term. Suppose one takes a term plan for securing till the age of 60, your family will get the insured amount if you have an unfortunate demise before turning 60 or policy attaining maturity.
Calculating Premium
With the advent of Policybazaar or Coverfox or any other insurance aggregators in the market right now, one gets to compare all at one place. For example, for me being a non-smoker and right now at the age of 26, I have a range of premiums as my option.
So now I have an option of paying a premium of ₹ 730-1021/month to get a cover of ₹ 1 crore if I die before turning 60. Hmmm... Is insurance good enough for my money?
Some Maths...
So I will be paying ₹800 for say for 34 years.
Premium I paid = ₹800 x 12 x 34 = ₹ 3,26,400
Insurance cover = ₹ 1 Crore ( Tax-free under Section 10(10)D)
Could I have built that corpus with mere ₹ 3.26 Lacs as an investment on my own? To answer that, If it would have been SIP of ₹ 800/ month,
with 12% return: ₹45.57 Lacs
with 15% return: ₹1.01 Cr
Yes, it goes without saying, risks are involved! What if you had invested a lump sum amount of ₹ 3.26 Lacs. The returns would range from ₹ 61 Lacs to ₹ 3.71 crores in 34 years depending upon the interest of 9% to 15%.
Big Question?
If I can make such big money, same as that my term insurance will provide me, then why do I need to get term insurance?
Analyzing Risks
1) Systematic Investment Plan(SIP): If the insurer had taken up SIP of ₹ 800/month for 34 years:
Cons:
Early Death: The investments insurer had planned, will fall short for the planning and will not generate the goal amount(for say, ₹ 1 Cr).
Under-performing funds: The funds perform less than expected.
Pros:
Comfortable payments: The SIP is small and easy to pay like term insurance premium
Liquidity: In times of distress or need of money, an insurer can have the money with tax deductions and exit load.
Expedite Payments: Insurer can anytime top-up to a bigger amount when one has some money to deposit.
Returns: Ultimately it's an investment, at least one gets the money they have invested.
2) Lumpsum: If insurer invests ₹ 3.26 Lacs into mutual funds/equities for 34 years:
Cons:
Early Death: The investments will need to wait for 34 years, despite one's death, to grow to the goal amount.
Payment: Unlike SIP and premium payments, the payment is huge for a single payment and involves high-risk.
Under-performing funds: The funds perform less than expected.
Pros:
Liquidity: In times of distress or need of money, an insurer can have the money with tax deductions and exit load.
Returns: Ultimately it's an investment, at least one gets the money they have invested. It will better perform than SIPs for a long tenure.
3) Term Insurance: When insurer takes term insurance for a premium ₹ 800/month for 34 years:
Cons:
Returns: The money is only insured at the expense of the insurer's death (very sad).
Uninterrupted Premiums: Insurance cover ceases(becomes invalid for the claim) once the premium payment stops, with no returns for the premium paid.
Maturity: For survival in the term insured, no maturity claim can be made, I guess that's the reason why one was paying the premiums for!
Pros:
Premium rates: The premium rates are damn low for the covers it provides.
Security: No matter how many premiums have been paid, but if the insurer has an unfortunate death, the insured sum will be issued to the nominee/beneficiary.
Risk-free: Given you have provided all your details correctly(health, habits and salary), the premium amount remains the same throughout the tenure period and guarantees the claim one's family will make.
My Thoughts...
Is it required?
Yes, It is required to save our family from the loan repayments, lifestyle crisis, education plans, marriage and other needs that will be required when we are gone. It is not an investment from where you seek returns. It is insurance in true sense where we are planning to leave behind a huge amount after the unforeseen event. The premiums get you tax-rebate, the claims are tax-free and ensure our family doesn't have to worry about the money.
Who needs it?
Anyone aged between 25-45 years who have dependents on them should opt for a 25x of their annual salary cover(for example, anyone having an annual salary or income above ₹ 5 Lacs are eligible for a cover of ₹ 1 crore). If you don't have any dependents on you, definitely, it is not for you! If at any stage of term insurance tenure, you realise that you have no more dependents on you, cease the premium payments, it attracts no penalty!
What should be the tenure?
Tenure should depend on you completely, it's a personal judgement of when can you stop worrying about your dependents and just think of you. In other words, tenure should no longer be the age when you think that your dependents are capable enough to earn for themselves and need not need your support. Someone can opt till the age of 55, when one is relieved of all responsibilities or it can be till your retirement age, 60!
What's the problem with lifetime tenure?
In my opinion, once you are past the responsibility age or say retirement when a pension is your only source of income, you become more of a consumer. Health risks, daily needs and medicines will cost you more than your pension. At this stage, you need more money than your dependents. So save that extra cash for yourself(Baghbaan dekhi hogi..), let your years of investing help you generate money for you and your family in the coming years.
When should you opt for it?
Earlier the better, when you start early you pay lower premiums, premium amount increases with the age. For example here (annual premiums):
26:
₹ 8295 * 34 years = ₹ 2,82,030
₹ 11,564 * 34 years = ₹ 3,93,176
35:
₹ 11,658 * 25 years = ₹ 2,91,450
₹ 15,484 * 25 years = ₹ 3,87,100
40:
₹ 14,909 * 20 years = ₹ 2,98,180
₹ 20,768 * 20 years = ₹ 4,15,360
Conclusion
I know, this one doesn't answer all your queries about term insurance like Are ULIP policies a good option, how to choose the best term insurance for you, premium payback or limited pay, should you add accidental death cover or critical illness riders, how will the beneficiary and nominee claim the insured money, etc. But to answer your question on, do you need term insurance? The answer is Yes if one has to leave the family insured and protected for an untimely death where no financial goals can match their needs! Premiums are damn low when you are asking for such covers.
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