1. Term insurance is meant to provide your dependents with enough money to replace your income in case of death, for them to take care of:-
a) Basic family expenditure,
b) Major expenses like education and marriage of children, and
c) Other liabilities like outstanding loans.
2. Your term plan's tenure should always cover the age till you aim to work, even considered as 65-70 years by insurers for offering policies.
3. Thumb rule for deciding your term plan compensation should be:- Outstanding loans plus 8-10 times your current annual income (or 20-25 times current annual expenses), as it presumes that your dependents would be able to fulfill the unfinished goals and become debt-free with the received amount.
4. It is, therefore, logical that this amount should also increase along with your loans, income and inflation-driven expenses as well.
5. However, if you aim to increase this compensation by calculating it after periodic gaps, you may run the risk of paying higher premiums as well as outright refusal of new policies after some time, due to various reasons like increasing age, health deterioration, etc.
6. Hence the need to buy term plans at a healthier younger age, say 25-35 years, for longest possible tenure, say 65-70 years age, for suitable compensation, calculated / estimated in advance, and as consented by the insurer.
7. If you are a regular long-term SIP investor in growth-oriented mutual funds, instead of buying one omnibus term policy, it is beneficial to take smaller plans of varying terms simultaneously (even from different insurers if you want, but after declaring them to all), because:
a) Premium rates on term plans go up as the tenure increases,
b) Premium outgo can be reduced, by splitting the total cover across various tenures, without compromising on its extent,
c) Splitting your cover, say of 1 crore taken at the age of 30, into 4 smaller plans of 25 lakh each, with 4 different maturities of 10-40 years, reduces premium costs substantially,
8. As your insurance needs taper off with age (due to investment corpus and asset build-up, loan repayments, goals fulfilled, working and settled children, etc.), you can keep reducing your total cover by terminating the policies one by one.
9. In this way, you can ensure that as your insurance needs come down with age, so does your premium costs, leaving more savings in your hand to invest for your own retirement corpus, as all term policies get elapsed without any benefits upon survival.
10. To solve specific problems of insufficient term cover due to inflation or increase in income, some insurers also offer plans where cover increases
every year by 5-10%, or is indexed to inflation, automatically increasing the sum assured in future years.
11. If you must go for such plans, opt for either a 10% annual increase or an index-linked one, although some plans allow you to increase sum assured at certain lifestages like marriage or new home or childbirth.
12. In any case, your revised cover cannot be more than 3 times original sum assured, and premium of such plans is higher than an ordinary plan.
13. Similarly, there are plans where the cover keeps reducing as you repay big-ticket credits such as house loans.
14. All said, it is best to go for simple term plans for your specific needs, than for complex offerings, where you can configure the tenures by opting for several term plans in a way that they match your financial goals, and whenever a goal is achieved, the corresponding term plan terminates.
a) Basic family expenditure,
b) Major expenses like education and marriage of children, and
c) Other liabilities like outstanding loans.
2. Your term plan's tenure should always cover the age till you aim to work, even considered as 65-70 years by insurers for offering policies.
3. Thumb rule for deciding your term plan compensation should be:- Outstanding loans plus 8-10 times your current annual income (or 20-25 times current annual expenses), as it presumes that your dependents would be able to fulfill the unfinished goals and become debt-free with the received amount.
4. It is, therefore, logical that this amount should also increase along with your loans, income and inflation-driven expenses as well.
5. However, if you aim to increase this compensation by calculating it after periodic gaps, you may run the risk of paying higher premiums as well as outright refusal of new policies after some time, due to various reasons like increasing age, health deterioration, etc.
6. Hence the need to buy term plans at a healthier younger age, say 25-35 years, for longest possible tenure, say 65-70 years age, for suitable compensation, calculated / estimated in advance, and as consented by the insurer.
7. If you are a regular long-term SIP investor in growth-oriented mutual funds, instead of buying one omnibus term policy, it is beneficial to take smaller plans of varying terms simultaneously (even from different insurers if you want, but after declaring them to all), because:
a) Premium rates on term plans go up as the tenure increases,
b) Premium outgo can be reduced, by splitting the total cover across various tenures, without compromising on its extent,
c) Splitting your cover, say of 1 crore taken at the age of 30, into 4 smaller plans of 25 lakh each, with 4 different maturities of 10-40 years, reduces premium costs substantially,
8. As your insurance needs taper off with age (due to investment corpus and asset build-up, loan repayments, goals fulfilled, working and settled children, etc.), you can keep reducing your total cover by terminating the policies one by one.
9. In this way, you can ensure that as your insurance needs come down with age, so does your premium costs, leaving more savings in your hand to invest for your own retirement corpus, as all term policies get elapsed without any benefits upon survival.
10. To solve specific problems of insufficient term cover due to inflation or increase in income, some insurers also offer plans where cover increases
every year by 5-10%, or is indexed to inflation, automatically increasing the sum assured in future years.
11. If you must go for such plans, opt for either a 10% annual increase or an index-linked one, although some plans allow you to increase sum assured at certain lifestages like marriage or new home or childbirth.
12. In any case, your revised cover cannot be more than 3 times original sum assured, and premium of such plans is higher than an ordinary plan.
13. Similarly, there are plans where the cover keeps reducing as you repay big-ticket credits such as house loans.
14. All said, it is best to go for simple term plans for your specific needs, than for complex offerings, where you can configure the tenures by opting for several term plans in a way that they match your financial goals, and whenever a goal is achieved, the corresponding term plan terminates.