Many people don’t understand the importance and power of adequate insurance. A life insurance for instance, is important to protect your family, financially. Many people in India are under insured. This means they avail life insurance, but the sum assured is not sufficient for self and family. Many citizens don’t explore life insurance products.
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Many citizens avail endowment life insurance, as they think it gives higher tax benefits compared to a term life insurance policy. Take the example of Roshan, who is a 30 year old IT employee earning Rs 7,00,000 a year. He doesn’t know which life insurance to avail, endowment or term insurance?
Let us help him with the premiums:
Now, Roshan would want to avail an endowment policy for two reasons:
Availing an endowment plan does seem wise. In reality, it isn’t. Roshan will pay high premiums for a low sum assured on the endowment plan. Though he’ll get the sum assured on maturity, it is not sufficient to cover his family. If something untoward happens to him within policy tenure, how much will his family get from the endowment policy?
He will only get the sum assured of Rs 10,00,000 + guaranteed bonus + reversionary bonus (if any). The insurer will not pay him any terminal bonus because it is only paid on maturity of the plan. Say he is married and has two children, his spouse is a homemaker and his parents are dependent on him. Will this amount be sufficient to take care of family needs?
Had he availed a term life insurance, his beneficial nominees would have got Rs 1 Crore.
Therefore, it is best to avail a term life insurance plan. As income increases, you can avail an additional term life insurance policy or an endowment plan as per financial goals.
When it comes to availing a term life insurance, insurers look at your income. You won’t get a term insurance of Rs 1 Crore, if you are earning only Rs 3,00,000 a year. Ideally, term insurance should be 10 times your annual income. When income increases, you can buy additional term plans.
Learn how to select the best life insurance plan according to income:
Don’t blindly avail a life insurance plan. Do your research. Decide on an appropriate sum assured that goes with your needs. You can arrive at this figure by calculating daily expenses and outstanding financial liabilities (debts). Do consider children’s education and wedding expenses, desired retirement corpus, etc.
Consider the following:
To make calculation simpler, don’t include:
Term Life Insurance Cover Required = [35,000*12*(1 – (1.05) ^20)/(1-1.05)] + 17,50,000 – 5,00,000 + 25,00,000 = Rs 2,37,95,382.
You must ideally avail a Term Life Insurance Plan with sum assured that is 10 times current annual income.
If Roshan applies for a second term insurance plan, he has to inform the new insurer on his existing insurance plan. Term Insurance is a protection which should ideally cover your working life. While you might arrive at a higher sum assured figure after calculations, it is not absolute.
Remember, insurance is not an investment. So, it isn’t wise to be over-insured. The best thing is to get a decent term insurance cover and continue investing according to your financial goals and risk tolerance capacity.
Be Wise, Get Rich.
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