After years of struggling and striving for parental bliss, new parents Aarti and Akshay, are jubilant over the birth of their darling daughter, Ananya. Life has changed, the nights once spent chasing deadlines, are now spent changing nappies, frequent feedings, cradling and crooning sweet nothings to calm their baby.
However,this everyday hustle is not the only reason why sleep evades the couple, rather, it’s the same old nagging question that haunts many young parents, “Who will take care of her if something happens to us?”.
If you are a parent and find yourself nodding in agreement to their apprehensions, read on to know why Term Insurance may hold the key to securing your child's future and pacifying your worries.
Term Insurance : The What and the Why
Every parent wants to give their child the best life imaginable, and this is possible only through careful financial planning and well-planned financial decisions. Getting a term insurance is one such decision.
For the uninitiated, Term Insurance is an economical and popular life insurance policy option. Its functioning is very simple: if the insured person dies during the policy term (that is, a specified number of years for which the policy has been taken), the insurer pays out the death benefit (the amount agreed to be paid by the insurer at the death of the insured) to the insured individual’s beneficiaries.
Term insurance policies have a variety of modes whereby you can pay the premium. For instance, you can choose to pay in monthly, quarterly or even half-yearly installments, depending upon what suits you best.
Term insurance is affected by several factors, of which some are specific to the policy and the insurer, and some are general. General factors like the age of the insured at the time of taking the policy and whether the person seeking insurance smokes or not has a bearing on the premium rates for the policy.
If both parents of the child are working, it is a good idea for both of them to take a term insurance policy as it provides two-fold security and ensures that education expenses, wedding expenses, and other such requirements of the child do not get compromised due to the untimely demise of either or both of the parents.
Light on your pocket, heavy on protection
You don’t have to pay through your teeth to secure your child financially. Believe it or not term insurance is one of the cheapest insurance products that provides life coverage, probably cheaper than your monthly Netflix subscription.
A certain 30-year-old, nonsmoker gentleman can get a cover as high as Rs 1 Cr (policy tenure of 35 years) for a meagre monthly premium of Rs 500*, which is a very small financial commitment as compared to the protection it provides.
*The prices are indicative and subject to change based on several factors.
Breathe a sigh of “Tax Relief“
Apart from peace of mind and a secure future, term insurance also provides you tax savings. As per the provisions of Section 80C of the Income Tax Act, 1961, the deduction for the purchase of a life insurance policy can go up to the maximum limit of Rs. 1,50,000. Besides this, section 10 (10D) provides that any amount that you receive against a life insurance policy including death benefits or sum allocated by way of bonus will not be considered taxable.
Buying a term insurance: Where to begin?
Getting a term insurance policy is easy due to the availability of plenty of options. However, too many choices can be confusing and you may end up selecting something that may not be the right option for you, just to get over with the process quickly.
There are two important questions that you need to figure out before venturing out to find the right term insurance policy for your family.
Term Insurance Tenure
Pay some attention while selecting the right tenure. We suggest that ideally, you should take a term till your retirement or maybe till a few years post that. As term insurance covers the loss of your income to your family, cover should be taken for your earning years only. For most of us that would mean having insurance till 60-65 years of age. A higher term usually translates to higher premiums and hence taking a cover till 70-75, especially if you plan to retire at 60-65 does not really make sense.
Term Insurance Cover
The optimum amount of sum assured depends on several factors, for instance, the number of dependents you have, your existing loans and liabilities, existing investments and assets, your children’s education and special needs if any and the lifestyle you want to provide your family in case of your death. As a general practice, you can use the following rule of thumb to understand how much cover you should take.
Minimum Sum assured = Annual Income 15 Times + Loans/Liabilities
If you need a closer estimate, you can choose the following methods to calculate the cover; Income method and expense method.
A very simple method, the right life cover amount is calculated as the lump sum amount, which if you invest today, at prevailing rates of return will amount to the same income stream as that of the insured person. If currently you are 30 years old and your income is 10 LPA and you are expected to earn till the age of 60. Assuming your income increases by 10% per year, so your annual income over your lifetime will be Rs 10 Lakh, 11 Lakh and so on till you retire, with last year’s income amounting Rs 1.75 crores. Now this is the income flow that needs to be replaced if you die today. The sum of all your expected annual incomes come out to be Rs 18,19,43,425. But this is future money. In today’s terms, the inflation-adjusted equivalent amount would be Rs 3,00,00,000. So this is the amount of life cover you should take as per the income method calculation. On your death, your family will get this lump sum which they can invest and then withdraw an amount equal to your expected ‘income’ every year.
In this method, instead of trying to replace your income we calculate how much expenses your family is going to bear over your lifetime. This may include loan payments, major expenses like paying for your children’s education and wedding. The total expenses required to fulfill all requirements is how much life cover you should choose. You can check out our Life Insurance calculator to accurately calculate how much cover you may require.
Once you have fixed the tenure and the basic cover, go online and compare the term plans presented by various insurance companies. Read about riders and assess whether you need them or not. Also check, if the rider is already available as an in- policy benefit in some other insurance policy. If you arrive at the answers to these basic questions, consider yourself equipped enough to select the right term insurance policy.
However, if you still find yourself in a fix, it is highly recommended that you consult a financial advisor, who will be able to provide you guidance on such matters through the years.
P.S. Term insurance is now available on Goalwise Platform! We have done the homework on your behalf and zeroed in on the best term insurance plan there is. Check out our term plan here.
Most importantly, relax! These are one of the best years of your life that you will always reminisce fondly. Instead of just fretting over the “what ifs”, take affirmative action and equip your family for contingencies. Invest in a term insurance policy without further ado and give your child the priceless gift of security.