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Posted at: Mar 20, 2017, 12:37 AM; last updated: Mar 20, 2017, 12:38 AM (IST)

Term insurance the ideal life cover option

Term insurance the ideal life cover option

KS Gopalakrishnan

My job provides me the opportunity of meeting people from varied professions. We discuss varied subjects — latest Bollywood movies to the US elections to the effect of demonetisation. Most conversations drift to personal finance as the subject interests me the most. I end up striking a conversation about financial planning and life insurance.

While most people I interact with have a life insurance policy, they do not understand the product they have bought. When asked which insurance policy you own, the typical response I get is “I pay an annual premium of Rs30,000”. As I probe further, I find that a majority has a savings-cum-insurance product or a unit linked insurance plan. So in this scenario, a person paying Rs30,000 annually gets an insurance cover of just Rs3 lakh.

Are you wondering why Rs3 lakh is not enough? Let me answer this question by first explaining what insurance is. Very simply put, insurance pays for expenses incurred towards damage of an insured item.

What if the insured item is a person? Let us take the example of Vijay, who earns Rs5 lakh every year, is married to Meera, who is a homemaker, and has a daughter. Given the rising uncertainties in today’s world, what happens to the family if an unfortunate event befalls Vijay? His family will not only lose him, but also the financial safety that his income provides. Without an alternative source of livelihood, Meera cannot manage the household. In this scenario, imagine Vijay had only Rs3 lakh worth of insurance cover; it does not even equal his annual salary.

Vijay should have bought an insurance cover that at least replicates his annual income until his family finds an alternative source of income. Assuming Meera invests the insurance amount in a fixed deposit earning 8 per cent annually, Vijay should have bought a cover of Rs60 lakh. An 8 per cent interest on Rs60 lakh would mean an income of Rs4.8 lakh for his family.

Term insurance is the most ideal tool for providing financial security to your loved ones. It provides a life cover at lower premium rates, a tax benefit and is easy to understand and flexible. In brief, it offers an inexpensive and simple method of ensuring financial security for your loved ones.

The question arises that if term insurance is an ideal product, why do so many people buy savings-cum-insurance or a ULIP product first? For many years, life insurance in India has been viewed as a vehicle for savings for the long term. While it is important to save for one’s retirement, child’s education and so on, it is even more important to financially protect the family if something goes wrong. Therefore, one should first buy a term insurance with the right cover and only then buy other products.

An uninformed purchase can lead to an inadequate cover. Before you buy a term plan, it is crucial you conduct a thorough research and get a proper understanding of the product that matches your needs. With a wealth of information available at your fingertips, it is easy to compare the products as well. You must consider several factors before buying a term insurance. The cover should be enough that it can replicate your annual income and ensure that your loved ones are financially sound until they find an alternative source of income.

The author is MD & CEO, Aegon Life Insurance. The views expressed in this article are his own.

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