What is Term or Pure Insurance?
Term or Pure insurance is the purest form of life insurance. You pay only for protection in term insurance and there is no investment component in it. So you pay the premium each year and your family is covered in the event of your death. That is to say, if you die, they get the money. If you don’t die, then nothing happens: they don’t get the money and neither do you. It’s as simple that. But people look at the numbers so closely that they forget to consider the value it can truly render when it is actually available for use.
Here are small instances of insurance; perhaps these are not examples from mainstream finance, but they illustrate the concept of insurance nevertheless...
You wear helmet/seat belt while driving is as safety measure is supposed to be an Insurance which covers you from huge damage in an accident and price you pay inconvenience of wearing the helmet or seat belt. Similarly, you try to reach the railway station 1 hour before the scheduled departure time of train is also supposed to be an Insurance which covers you from missing your train and price you pay time wasted just sitting at the station.
What I want to say is that we are all aware of the concept of insurance. The only thing is that when it comes to term insurance, something happens to us. We tend to run away from it because perhaps we are conditioned to think that it does not offer any great benefit... if nothing happens to us, it does not return your money to you. So we are conditioned to believe that anything which does not give some return is not worth considering. But that’s not true...let me show you why.
Protecting your loved ones
People hate the idea of purchasing term or pure insurance, but they love their families. Do you see some conflicts here? How can we hate something which could benefit someone we love? We try to give our families all the happiness possible...we buy gifts for them and take them on vacations. We never take time off to think about unpleasant situations-like an untimely demise. But this can happen to anyone at any time. Why should we carry on thinking that we are above it and cannot happen to us? We take the idea of unforeseen eventualities very lightly and as a result when bad things happen to us, we really have no recourse. So, we make sure that we protect them from tough situations, all the worries and problems in life. Ask yourself, what have you done to take care of them after your demise? That’s the real test of what you have done for them. Have you gifted them the biggest thing in life- “Adequate Protection”?
How much Protection do you need?
The insurance cover amount which your dependents receive should be able to provide the current life style for them for regular day-to-day expenses of your family with an inflation adjusted return, pay your current liabilities, emergency expenses and meet the goals you share and buy assets which you wanted them to own. Read:Don’t buy Life Insurance, Buy adequate Cover!
Let take an example
Suppose you want to purchase enough term life insurance to provide your dependents with a monthly income of Rs 20,000 for the next 30 years. Assuming that the expenses also increase by 7% per year and the money stays invested at the rate of 9% in a fixed deposit, how much should be the insurance amount? The answer is Rs 63 lakh.
Here’s how. Let’s work backwards. If you family invests Rs 63 lakh in a fixed deposit which earns them 9% per annum, they can start withdrawing Rs 20,000 per month from that pool of money and increase their drawings by 7% every year. Accordingly, in the first year they will withdraw Rs 20,000 per month; in the second year their expenses will increase by 7% they will withdraw Rs 21,400(7% increase over Rs 20,000) and so on... This way all the money will be exhausted in 30 years, but it will cover their monthly expenses for all 30 years. But suppose you have a home loan worth Rs 20 lakh and car loan worth Rs 3 lakh, then put an additional Rs 23 lakh to your Rs 63 lakh and opt for a cover of Rs 86 lakh. This will stand as good enough approximation of the cover you need. A rough estimate is all you need. Don’t try to arrive at an exact number; 5-10% here or there won’t make much of a difference. Stay focused on the big picture, which is getting adequate life cover i.e. by paying affordable annual premium of Rs. 8,600 by a person aged 27 years to obtain online term insurance cover for Rs 86 lakh and to let you free from the worries of your dependents after your demise.
However, the insurance premium that you pay will not cross 2-3% of your income per year in most cases. This is for an illustrative purpose only.
Here’s some information on term insurance:
• All life insurance companies offer term insurance plans.
• You can buy these plans offline from an agent or online (without online an agent). However, only some companies offer the online version of term plans, not all.
• Online term insurance is cheaper than offline term insurance.
• You can pay the premium annually, quarterly or monthly.
• The older you are at the time when you purchase a policy, the higher the premium that you pay will be.
• You can return the policy within 15 days of receiving it in case you are not satisfied with it.
• You can discontinue the policy whenever you wish to; so in a way it becomes an annual contract instead of long term commitment unlike traditional policies.
Conclusion
I hope this article has given you enough reason to think about your loved one’s protection and enough motivation to purchase it. Arranging for the protection is not big expense these days. You can buy term plans for your family and secure them. And remember, while concentrating on today is important; don’t lose sight of the future. Hope for the best but be prepared for the worst!
“Get insurance as if you were to die tomorrow”
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