As a responsible adult, step one of planning for the future, your family and life events should be insuring your life. This insurance should adequately replace the lost income from your absence, enabling your family to continue living comfortably despite their loss.
The simplest life cover is the term policy. It offers death benefit i.e., your nominee will receive the sum assured in case you pass away during the policy term.
If you are not around, your family’s financial state would be affected. You need to settle on a sum assured that would act like a financial shield for them in your absence. To do this, all insurers provide term plan calculators, which include term plan premium calculators as well.
Work out how much your family would need to live comfortably for a year. Now, multiply that number by at least 15, ideally 20. Basically, if you weren’t around, you will leave a corpus that will ensure their comfort for at least the next 15 (or 20) years.
Caution: You might not think of a few current liabilities – like outstanding home or personal loans (and their interest payments) or credit card debt. There might be other expenses and financial liabilities. Or you might forget to consider inflation over the years. So, make sure such financial liabilities are considered when you calculate the sum assured.
Term insurance calculator: Main parameters
Once you have a good idea of the sum assured, you can use the term insurance calculator (TIC). These tools are easily available online. The TIC will ask you to enter a few basic facts about you and your requirements. Given below are the factors that are taken into consideration by a term insurance calculator.
Like any life insurance, your age is the most important parameter. The younger you are, the lesser your term insurance premiums will be. This is another reason why you should look at getting term cover as early in life as possible.
The calculator will ask for your gender. Why is this relevant? Statistics and actuarial data show that men are riskier than women in some scenarios, while women are more in others. So, the risk profile of a 25-year-old male might differ from that of a 25-year-old female, affecting their respective premiums. For instance, if you and a friend of the opposite sex, both of the same age, apply for the exact same policy, you may end up paying different amounts as premium.
How long do you want to insure your life? For instance, if you are 25, there are 35 or so productive years to come where you will earn increasingly higher sums of money. Therefore, at least a 35-year term policy will make sense here. Calculate your insurance tenure according to the financially productive years you have left. That’s it. The premium calculator will now crunch the numbers and put out the annual premium amount. This is the amount you need to pay to start coverage and continue doing every year to ensure policy coverage.
Term insurance with return of premium
Term insurance offers only death benefits. Some part of you might think “I will never reap the financial benefits of paying these premiums”. There’s term insurance with return of premium for those who are looking for such benefits. In this kind of plan, you receive the total sum of premiums paid during the policy period when the policy ends. For instance, you have taken a ₹50 lakh term cover for 20 years, for which the annual premium is ₹10,000 (please note these figures are just for easy illustration). If you were to pass away during the policy term, your nominee will get the entire ₹50 lakh as death benefit. If you survive the entire 20-year policy period, you will receive ₹2 lakh i.e., ₹10,000 x 20. For such policies, the premiums will be higher than pure term insurance policies.
The term policy should be one of the foundation stones of your financial planning. It provides you peace of mind to go ahead and do your work competently, to take some risks to better your and your family’s life. Use the term insurance calculator to do so smartly.