Life insurance, your most important personal finance decision?

Sara G. Norris

According to industry experts, term insurance is the simplest, purest and most convenient form of insurance. It pays the entire sum assured if the policyholder dies during the policy tenure or term. If the life assured lives to the end of the policy tenure, the insurance coverage ends, and the insurer pays nothing.

Sajja Praveen Chowdary, head— term insurance, Policybazaar.com, said, “Several elements, including your age, sum assured, health risks and plan length determines a term insurance premium. Furthermore, the premium you pay covers mortality charges when you buy term insurance.”

Mahavir Chopra, founder & chief executive, Beshak.org, said that before you think about buying term insurance, think about whom you are buying it for. “Remember, you won’t be making use of the money; it’s your dependents who will get the money. Hence, buy term insurance only when you have financial dependents or have a large loan on your head,” said Chopra.

Apart from this, buying a term plan at an early age would save on premium, but there is an opportunity cost of investing that entire money into another fund. Hence, you must purchase term insurance only when a financial dependent is visible or to protect a loan.

Chopra said that term insurance coverage should be the difference between how much you owe and how much you own. How much you owe will include loans, your dependent family’s financial goals such as child education. How much you own will include all the financial assets that can be liquidated to take care of your family’s needs in your absence. For instance, you must include your mutual funds or stocks, but probably not include the house they will live in.

For example, you need term insurance if you are the sole breadwinner in your household. Consider what would happen to your parents, spouse and children if you weren’t living for a moment. What would they do if everything went wrong? Will they be able to cover their everyday expenses with their resources? Life insurance is primarily intended to protect you and your family from an unforeseeable disaster.

Chowdary said, “A lot of young couples nowadays start their marriages with a lot of debt, such as student loans. This situation can quickly devolve into a disaster if only one person is left to make the payments. Another critical situation in which term insurance is required is when the partners’ incomes are vastly different. By insuring the difference, the lower-income person can easily support their current standard of living even if the higher income person dies.”

Not invested enough to fund your child’s higher education dream: Nowadays, higher education costs are increasing year after year, and if you fail to plan for their studies, they won’t be graduating from college without incurring debt. Therefore, if you intend to pay for your child’s private school or college education partially and take a student’s loan, you need to have a term policy.

Benefits of buying term policy

Affordable premiums: You get term insurance of a high-value life cover at an affordable premium compared to other life insurance policies. Moreover, you can pay the premium either monthly/half-yearly/yearly mode. Besides, the earlier you buy term insurance, the lower premium you will have to pay. Naval Goel, founder and CEO, PolicyX.com, said, “Term insurance is a significant policy that helps an average salaried person get a considerable corpus amount in the long run for their family at an affordable cost of premium prices.”

Additional riders

The term insurance plan comes with several riders, such as critical illness benefit that covers diseases like cancer, kidney failure, heart attacks, major surgery, paralysis and other life-threatening diseases that can be very expensive to treat.

Incremental term insurance: These days, the term plans come with an increasing cover benefit that allows a person to increase the sum insured depending upon the real-time personal needs such as a wedding and kids’ education. Otherwise, a person needs to invest in a new term plan to elevate their policy coverage.

Sum insured payout: The variety of payout flexibility such as lump sum, monthly, or annually offered to insured helps manage the expenses of the family as they can plan the receiving of the sum insured as per their needs of funds. For instance, if an insured had equated monthly instalments, or loans to be paid off, you can easily match the payout of the term insurance to the payment of their debts for the easy payoffs.

Tax benefits

You can get tax savings on premiums paid under Section 80C of the Income Tax Act. Further, the lump sum amount received by beneficial nominees as the sum assured (death benefit) is exempt from taxes subject to Section 10 (10D) of the Income Tax Act if the sum assured is more than 10 times the annual premium.

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https://www.livemint.com/money/personal-finance/life-insurance-your-most-important-personal-finance-decision-11640019689818.html

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