All you need to know about Term Insurance

Last Updated on Oct 18, 2023 by Ayushi Gangwar

Thinking about death is depressing. No one wants or likes to do it.

This prompts us to think if we have anyone in our family who is financially dependent on us. Be it your children or your parents who might retire in a few years. However, there exists a crucial question that, when addressed, can make a world of difference for your loved ones: “If you die, will your family be able to maintain their lifestyle without your income?”

Let’s face it, none of us like to dwell on such morbid thoughts, but these are questions that demand our attention. The answer to this question can often be the difference between leaving your family in financial turmoil or providing them with a safety net that allows them to navigate through challenging times.

That’s where Term Insurance comes in.

Understanding Term Insurance

Term insurance is a type of life insurance that provides coverage for a certain period or ‘term’.

In the simplest of terms, say you buy a Term Insurance policy with a ‘Sum Insured’ of 2 Crores and a ‘Term’ of 30 years. If you pass away within the next 30 years, then your family (beneficiaries) will get paid Rs. 2 Crores in lump sum.
It is supposed to replace your income for a few years so that your family doesn’t have to worry about money when they are still coping with a loss.

Term Insurance is one the easiest and most cost-efficient ways to ensure your family’s financial security
In case of your demise during the policy ‘Term’, your family gets a lumpsum amount of cash.
For this policy to stay effective, you pay a small amount each year in ‘Premiums’.
If you outlive the policy ‘Term’, you or your family don’t get any money back, nor do they get any payout. It’s a happy trade-off against you living a healthy and long life.

Note: This is an oversimplification of the policy terms and benefits. You should read all the details and consult with an advisor before purchasing a policy. You can check out Beshak to compare policies and get a free consultation with an insurance expert.

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How to make sure if you really need it?

You probably need Term Insurance if any of this resonates with your life:

Your parents are or are going to be dependent on you financially post-retirement.
You have kids or plan to have kids who will be dependent on you for the next 10-20 years.
Your spouse might not be financially dependent on you but needs your help to maintain the current lifestyle.
If you have not yet made a wealth corpus for your major life goals like a child’s education or marriage.

When is the right time to consider it?

The right time to buy Term Insurance is as soon as possible!

The premium is charged based on the age at which you enter the policy, and then this rate remains constant, throughout the tenure. The general rule of thumb prevalent in the market is that you buy it as early as possible, to keep life-long premiums low.
The older you are the higher the premium you have to pay. Annual premiums usually increase by 4-8% each year as you grow older.
If you develop any lifestyle-related illnesses (ex: related to smoking, drinking, etc) as you age, there are high chances that insurance companies will not give you a policy or they’ll just raise the premiums by 50%-100% for you.

It’s best to buy Term Insurance when you are younger and healthier.

Choosing the right duration

When choosing the duration of your term insurance policy, consider factors like your current age, retirement age, and the age of your dependents. The policy term should be long enough to cover these needs.

You become financially free once your family is no longer dependent on you for money. This can happen if:

Someone else (like your spouse, or kids) has become capable of taking care of all the financial needs of your family in your absence.
You have created enough wealth corpus to support your family.

Whichever of these events you believe will happen earlier, pick that duration for your Term. Better to have a 5-year additional buffer over it for safety.

There are also some ultra-long-term policies (about 50 years of the term) in the market. They only make sense if you’re excited about getting a 4% annual tax-free interest for 50 years.

How much cover do you need?

The amount of coverage you need depends on various factors like your income, debts, living expenses, future needs of dependents, etc. You will find a lot of articles that dive deeper into this, but a general rule of thumb is to have a cover 15 to 20 times your annual income.

Anything else you need to know about?

Most Term Insurance policies allow you to add riders or additional benefits at an extra cost. These can provide added protection for specific situations like critical illness, disability etc. Illnesses like Cancer can eat away all your savings, and vanilla Term Insurance won’t give any payouts while you are still alive. Some of these add-ons can provide monetary relief immediately upon diagnosis.

Read the fine prints

Before buying a Term Insurance policy, make sure you understand all its terms and conditions. Be aware of any exclusions, the claim process, the renewal process etc.

Beshak provides access to some of the best insurance advisors in India. Book a free consultation with them to get all the details before making a decision!