Term Insurance-
Term Insurance is an oft repeated word you hear in any investment planning. What is Term insurance? Term insurance is a type of life insurance policy that provides coverage for a specified period of time and in the rare event a death happens, a death benefit amount is provided to the nominated member or heir (generally family member).
Key thing to note is that the person on whom Term insurance is taken is not the beneficiary. It is his family or heir whom he has nominated to receive the amount.
Since Term insurance per se is not very beneficial to Insurance companies, they generally club it with investment and have many variants like pension for life for the family, return of the amount after a certain years etc. What this effectively means is insurance company takes extra money and probably invests @12-15% returns but gives you @3-4% and thus makes money. ULIPs is one example of extra money being taken for life benefit.
So, what should one do? Should they take Term Insurance at all?
If you have a family and care for them or old parents with no source of support other than you or any such close relative who are all dependent on you providing them financial support, it is critical to take a Term Insurance. The reason being after you, who will take care of them and provide the basic necessities.
Thus a pure Term Insurance (i.e without any investment product attached to it) should be taken for a significantly large amount ( say, 15-20 times of your current annual income). This comes at a small cost (as young people in their 30's who take such insurance are expected to live at least beyond 60 and risk to insurance companies is small). Note that insurance companies work on probabilities and if risk is high, premium is high, low risk lower premium. This is based on the payouts in the happening of the event. Further, their payout risk decreases if the person commits suicide or such other clauses they put in fine print.
Overall, the Term insurance is a standard product with a few clauses like self inflicted death not covered, but payout on death of the person taking the insurance is normally a given. Further, to protect the beneficiaries, these do not allow loans to be taken keeping it as a collateral.
Amongst the many reasons why a large amount is taken for Term Insurance are a) in the event any incident of death happens, the family/beneficiary gets a significantly large amount for them to put in, say, FD and earn interest to keep themselves off the streets and b) since the risk for the insurance companies is small as it is a single event (death) and probability is less at a young age, the premium is also small for such a large amount.
Who all should take the Term Insurance.
a) As mentioned above, if you have people to take care and are dependent on you providing them support you should take the Term Insurance.
b) If you have take a large loan for a house to stay for your family and beneficiaries and EMIs are there, you should take the Term Insurance.
c) If you are in a business and significant debt, you should take both Term Insurance as well as Key Money Insurance (which your business entity pays) to meet your debts in the event of any untoward incident to you.
Please note that the payout will happen only on death and not on serious injury or disease you suffer. For that health insurance comes into play.
For how long should you take the Term Insurance
As I said earlier, the Term Insurance is cheaper to take when you are young. As you grow older the risk to Insurance Companies is larger and a higher premium is charged. Many Term Insurance plan comes with 10-25 years locked premium where if you join in your 30's you pay a small fixed premium every year till you are 40 or 55 years. Beyond 60's the risk of death increases and thus premium increases. But most people, by the time they reach 60's are financially secure and for some the older dependent parents are also no longer there and the financial risk is only for the immediate family member, primarily the wife, as children also would have by now taken a job after education etc. Best is to assess the financial situation after 60 and then go for a term insurance if required, but note that the premium would be higher.
To summarize, Term insurance, apart from health insurance, must be in any young person's investment portfolio and Term insurance can be kept till you reach a financial comfort zone where you feel paying this extra amount does not add any significant value to my support for my family or any liabilities clearance that I have. At 30's till 50's it is critical to have, beyond 60 it is a choice
There is another insurance called the Key Man insurance and this is applicable for business where the insurance is taken on a key member of the business as in his absence the business could collapse or take a long time to recover.
