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Term insurance: Why splitting your plan can optimise both cover and cost

Term insurance: In October, the first-year premium of private insurers grew 23.56% to Rs 7,227 crore, and that of LIC grew by 36% to Rs 15,548 crore.

Written by Sandeep Singh | New Delhi |
Updated: December 3, 2020 12:11:55 pm
term insurance, coronavirus pandemic, pandemic savings, explained your money, indian expressTypically, a term plan should cover all your liabilities and major expected future expenses. (File Photo)

Fear often pushes people to buy insurance. Over the last six to eight months, as the pandemic severely impacted the economy and forced individuals to restrict spending, the insurance sector saw a sharp rise in demand for term insurance plans and premium collections. In October, the first-year premium of private insurers grew 23.56% to Rs 7,227 crore, and that of LIC grew by 36% to Rs 15,548 crore.

Four different announcements on the success of Covid-19 vaccine candidates over the last two weeks have lifted market sentiments and fuelled hope that the virus may be about to be defeated, and life could soon return to normal. Pfizer-BioNTech, Moderna, and Sputnik V have announced an over-90% efficacy for their candidates, and Oxford-AstraZeneca has said early results of phase 3 trials show its vaccine to be “highly effective”.

While Covid-19 has increased awareness about insurance, it is important for everyone to understand that it should not require a global pandemic for individuals to be nudged to buy a policy. A term insurance plan is a fundamental requirement and forms the base of an individual’s financial planning, providing cover against the most critical risk — that of life itself.

Who in the family should buy term insurance?

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The primary earning member of the family must have a term insurance cover. It should be taken as a protection instrument that is able to take care of his/her family’s financial needs after he/she is not around. The key to remember is that anyone who has a family to take care of, and has liabilities such as a home loan, car loan etc., must have term insurance.

It is also important to note that you should not wait to hit a certain age to buy a term plan. You may do so after you start working, and keep adding to the cover based on additional requirements. Starting early means a lower premium for the same cover. For example, if you are 30 when you buy a Rs 1 crore term plan up to age 70, your annual premium would be around Rs 12,000. The premium for the same plan will be around Rs 21,000 if you buy at age 40, and over Rs 32,000 at age 45.

How much should your insurance cover be?

Typically, a term plan should cover all your liabilities and major expected future expenses such as higher education of children, their wedding, and the living expenses for your family. Suppose you have a home loan of Rs 50 lakh, with principal outstanding of Rs 40 lakh; a car loan outstanding of Rs 3 lakh; and you need Rs 20 lakh for your child’s higher education, then your term plan should cover for all this until you turn 60. This should be apart from the cover amount that would provide for your family’s household expenditure needs after you.

One must ideally have term insurance cover until the age of 60, and can have a separate plan to provide for one’s spouse’s financial independence till the age of 70-75. Breaking your term plan into two — one until age 60, and the other until age 70-75 — would not only help you optimise your cover, but also optimise the cost. It is important to note that if you live beyond 60, you won’t be needing the cover against home loan, children’s education and marriage, as you would have already met those goals.

Also in Explained Your Money | Tax relief until June next year: should you buy a new home now?

How long should you take the cover for?

Ideally, the cover should be for the years when you build and have liabilities and see additions in the family. The term plan should provide cover for the period till your kids complete their education and turn independent, and you have built your retirement corpus that is good enough to sustain you and your spouse’s financial needs for the remainder of your lives. If you think you can do all of that by age 60, you don’t need a term plan beyond 60.

One must not confuse the need for a term plan with the need for health insurance. While term insurance starts to lose relevance after you have met all your liabilities, health insurance becomes more important after retirement, and should be taken for as long as it is available.

It must also be noted that alongside the term plan, retirement planning should also continue — if you have saved optimally for your post-retirement life, you don’t need a term plan beyond 60.

If you think you need to provide some additional financial cover for your spouse’s financial needs should something happen to you between ages 60 and 70, you can take a separate term plan of a smaller amount that provides cover until 70-75.

How can this optimisation help you save money?

Suppose you are 35 now, and are looking for a Rs 1.5 crore term plan till the age of 75 — your premium may come to around Rs 21,000 per annum for the next 40 years, aggregating to Rs 8.4 lakh.

Now, if you take a term plan for Rs 1 crore till the age of 60 and another plan of Rs 50 lakh till the age of 75, you will pay premiums of around Rs 11,000 (25 years; Rs 1 crore) and around Rs 8,000 (40 years; Rs 50 lakh) respectively — adding up to a total premium outgo of around Rs 5.95 lakh.

In both cases, you will get a cover of Rs 1.5 crore till the age of 60. After that, since the need of a term plan is reduced and is limited to some cover for spouse’s needs, by splitting the plans, you reduce your premium outgo significantly post-retirement. Also, since your post-retirement income is limited, and you are in most cases living on your savings, it is important to optimally spend from your limited monthly income. 📣 Express Explained is now on Telegram

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