As we navigate life, we often find ourselves responsible for others – our families, our loved ones. And with that responsibility comes the inherent desire to protect them, come what may. This is where financial planning steps in, and one of its fundamental pillars is the term plan. In simple terms, With a term insurance plan, your family is financially protected. If the Life Assured passes away during the policy period, their beneficiaries( Nominee) receive a lump sum death benefit, ensuring their financial stability. It’s important to note that if the insured individual outlives the policy term, the insurer does not provide any benefit to them or their beneficiaries. If you’re new to the world of insurance, the jargon can feel overwhelming. But don’t worry, a term plan is simpler than you think. Let’s break down this essential financial tool for beginners. Key Features of a Term Plan Sum Assured: The amount your family will receive in case of your death. A term plan provides a sum of money (called the “sum assured”) to your nominated beneficiaries if you pass away during the policy term. That’s it. There are no investment components or maturity benefits.( I covered this in my other blog https://wealthinn.in/term-insurance-dont-be-fooled-into-buying-these-products/) Premiums: The amount you pay to keep the policy active. Usually paid annually or monthly. Because it’s pure protection, term plans are significantly more affordable than other life insurance products like endowment plans or ULIPs. You pay a relatively small premium for a substantial amount of coverage. Policy Term :  As the name suggests, a term plan covers you for a specific period (e.g., 10, 20, 30 years, or even up to 85 years of age). If you outlive the policy term, the plan simply expires, and no payout is made. Riders: These are the extra benefits that are there apart from the basic sum assured. These options can be chosen while purchasing a policy. Optional add-ons like critical illness cover, accidental death benefit, etc. Why Do You Need a Term Plan? The Power of “What If?” Consider these scenarios: Young Professional with Dependents: If you’re the sole earning member supporting your parents or a young family, your sudden demise could leave them in a financially vulnerable position. A term plan ensures they have funds to cover daily expenses, loan EMIs, and future goals. Home Loan or Other Liabilities: If you have outstanding loans, especially a home loan, a term plan can ensure your family isn’t burdened with these debts in your absence. The sum assured can be used to pay off these liabilities. Future Goals: Your children’s education, their marriage – these are significant financial goals. A term plan can act as a contingency fund, ensuring these aspirations can still be met even if you’re not around. Essentially, a term plan answers the crucial “what if?” question, providing peace of mind knowing your loved ones will be financially secure. Key Factors to Consider When Choosing a Term Plan: Now that you understand the basics, here are some important aspects to keep in mind when selecting a term plan: Sum Assured: How Much Coverage Do You Need? This is perhaps the most critical decision. A general rule of thumb is to have a sum assured that is at least 10-15 times your annual income. However, also consider your outstanding loans, future financial goals, and your dependents’ needs. It’s always better to be adequately insured than under-insured. ( I have covered how much do you need in my blog https://wealthinn.in/understanding-life-insurance-a-guide/) Policy Term: How Long Do You Need Coverage? Align the policy term with your major financial responsibilities. If you have a home loan for 20 years, consider a plan for at least that duration. If your children are young, you might want a term that covers their education and initial years of employment. Do not buy policy terms beyond the time your liabilities are over, it will only cost you but won’t help you. Premiums: Can You Afford It? While term plans are affordable, compare premiums across different insurers. Don’t just go for the cheapest option; consider the insurer’s claim settlement ratio as well. Cheap is never the best. Choose an insurer who would pay your family in your absence without much issues to your family. After you your family should not suffer from another mental trauma!!! Claim Settlement Ratio (CSR): How Reliable is the Insurer? A high CSR (preferably above 95%) indicates that the insurance company efficiently settles claims. This is a crucial metric, as the whole purpose of a term plan is to ensure your family receives the payout when they need it most. You can find this data on IRDAI’s annual reports. We can help you with same. Riders: Add-ons for Enhanced Protection (Optional) Many insurers offer riders that you can add to your term plan for an extra premium. Common riders include: Accidental Death Benefit Rider: Provides an additional sum assured in case of death due to an accident. Critical Illness Rider: Pays out a lump sum if you’re diagnosed with a pre-defined critical illness. Waiver of Premium Rider: If you suffer a permanent disability or a critical illness, future premiums are waived, but the policy continues. Not just limited to these riders there are beyond these , but do you need them or they are just marketing gimmicks. You can learn by just asking us. The Bottom Line: Don’t Delay! A term plan is not an expense; it’s an investment in your family’s future security. It’s a testament to your love and responsibility. The younger you are when you buy a term plan, the lower your premiums will be. So, if you haven’t considered a term plan yet, now is the time. Speak to us, click this link , compare policies online, and secure your loved ones’ financial well-being today. It’s one of the most sensible financial decisions you’ll ever make.
What does Term insurance not mean or what it is not ? Cash Value: Unlike whole life or universal life insurance, term insurance doesn’t build cash value over time. This means you can’t borrow against the policy or receive a cash payout if you surrender it before the end of the term. Maturity Benefit: If you outlive the term of your insurance policy, you won’t receive a lump sum payment at the end. Term insurance is designed to provide coverage for a specific period, and there’s no payout if you don’t need it. Investment Returns: Term insurance isn’t an investment vehicle. While it provides protection, it doesn’t offer any potential for growth or returns. Guaranteed Premiums: While some term insurance policies offer level premiums, others may increase over time. This means your premiums could go up as you get older, even if you maintain good health. Real Life Scenario : What happens in real life scenario is people are mis selling or they themselves think since the money they have paid is not being return its not a good financial planning instrument. So two most common plans are sold in the market. Endowment plans Are a type of life insurance policy that combines life insurance coverage with an investment component. This means that in addition to providing a death benefit to your beneficiaries if you die during the policy term, endowment plans also offer a maturity benefit if you outlive the policy term and provides guaranteed returns ULIP ( Unit-Linked Insurance plans) is a type of life insurance plan that combines life insurance coverage with an investment component. They provide an opportunity to participate in the market or bonds. Unlike traditional endowment plans, ULIPs offer more flexibility and potential for higher returns. But the question is why mis-selling happens? Higher Commission: Your agent/ Bank gets a higher payout for selling. Guaranteed returns : It’s easier for agents to sell something with a guaranteed word , so they don’t have to spend a lot of time explaining Pressure : Banks sell these plans through their employees , they have a lot of pressure to sell. Is it that bad at all lets see this from the case of Endowment plans from real life scenarios Case Study : Customer who was looking to buy insurance cover was approached by bank to with the following two proposition instead of term plan The customer was pitched by his regular bankers to invest in this plan Called HDFC Sanchay plus ( this is not just limited to HDFC, it is all ICICI, LIC, Max etc. whatever policy you buy it would be the same.) His banker was really persistent on him to buy this plan that he used to call him daily , putting all tactics for him to purchase . After so many pressure calls he had almost given in when i got in discussion with him and showed him the reality. So let’s study the plan. HDFC Sanchay Plus Current age : 30 Years Policy term : 20 Years Premium payment term : 10 years Premium amount 1st year : Rs 5,22,500/- Premium 2 nd year onwards : Rs 5,11,250/- SI :Rs 64,37,500/- to Rs 1,27,58,919/- Policy Year Single/ Annualized Premium Guaranteed Non Guaranteed Survival Benefits / Loyalty Additions Other benefits (if any) Maturity Benefit Death Benefit Min Guaranteed Surrender Value Special Surrender Value 1 522500 0 0 0 64,37,500 0 0 2 511250 0 0 0 64,37,500 3,09,000 3,09,000 3 511250 0 0 0 64,37,500 5,40,750 5,40,750 4 511250 0 0 0 64,37,500 10,30,000 10,30,000 5 511250 0 0 0 64,37,500 12,87,500 6,83,148 6 511250 0 0 0 64,37,500 15,45,000 8,95,482 7 511250 0 0 0 64,37,500 18,02,500 11,41,343 8 511250 0 0 0 69,23,763 32,35,879 15,59,667 9 511250 0 0 0 74,10,026 37,68,008 20,82,332 10 511250 0 0 0 78,96,289 50,72,637 27,28,108 11 0 0 0 0 83,82,552 57,33,516 31,99,868 12 0 0 0 0 88,68,815 58,79,395 37,36,072 13 0 0 0 0 93,55,078 60,25,273 43,42,778 14 0 0 0 0 98,41,341 61,71,152 50,30,514 15 0 0 0 0 1,03,27,604 63,17,031 58,08,267 16 0 0 0 0 1,08,13,867 64,62,910 66,87,510 17 0 0 0 0 1,13,00,130 66,08,789 76,78,686 18 0 0 0 0 1,17,86,393 67,54,668 87,95,972 19 0 0 0 0 1,22,72,656 69,00,547 1,00,54,714 20 -11729523 0 0 11729523 1,27,58,919 70,46,426 1,14,71,419 Returns 5.78% The policy seemed so attractive that he would make Rs 1,17,29,523/- in 20 Years. but he forgot he had invested almost Rs 50,00,000/ and got just double the invested. A simple IRR calculation shows he would earn 5.78% IRR on this investment. Lower than your FD returns. We could argue that it was meant for protection but let’s see how much would he have paid if we just took SI of Rs 1,30,00,000/- from day one for 20 years , which in this case is applicable in 20 years. The same company offers us Term insurance plan for SI – Rs 1,30,00,000/- Payment Term : 10 Years Policy term 20 : 20 years. Premium : Rs 23,464/- And now the funny part if we take this Policy Year Single/ Annualized Premium Guaranteed Non Guaranteed Survival Benefits / Loyalty Additions Other benefits (if any) Maturity Benefit Death Benefit Min Guaranteed Surrender Value Special Surrender Value 1 499036 0 0 0 64,37,500 0 0 2 487786 0 0 0 64,37,500 3,09,000 3,09,000 3 487786 0 0 0 64,37,500 5,40,750 5,40,750 4 487786 0 0 0 64,37,500 10,30,000 10,30,000 5 487786 0 0 0 64,37,500 12,87,500 6,83,148 6 487786 0 0 0 64,37,500 15,45,000 8,95,482 7 487786 0 0 0 64,37,500 18,02,500 11,41,343 8 487786 0 0 0 69,23,763 32,35,879 15,59,667 9 487786 0 0 0 74,10,026 37,68,008 20,82,332 10 487786 0 0 0 78,96,289 50,72,637 27,28,108 11 0 0 0 0 83,82,552 57,33,516 31,99,868 12 0 0 0 0 88,68,815 58,79,395 37,36,072 13 0 0 0 0 93,55,078 60,25,273 43,42,778 14 0 0 0 0 98,41,341 61,71,152 50,30,514 15 0 0 0 0 1,03,27,604 63,17,031 58,08,267 16 0
Understand the Concept in simplest way  A term insurance/ Life Insurance is a type of insurance which provides for financial cover during a set period chosen by the life insured. Why do we need term insurance ? Term insurance is a crucial financial tool that offers a safety net for you and your loved ones. Here are some key reasons why you might need it: Protection for Dependents: If you have dependents, such as children or a spouse, term insurance can provide financial support in the event of your untimely death. The death benefit can help cover expenses like mortgage payments, education costs, and living expenses. Debt Coverage: If you have significant debt, such as a mortgage or student loans, term insurance can help your family repay those debts. This can prevent financial strain and ensure a more comfortable future. Financial Planning: Term insurance can be a valuable component of your overall financial plan. It can help you protect your assets and ensure that your loved ones are financially secure, regardless of unforeseen circumstances. Affordability: Term insurance is generally more affordable than other types of life insurance, making it a good option for those on a budget. Flexibility: Term insurance offers flexibility in terms of coverage and duration. You can choose a policy that meets your specific needs and adjust it as your circumstances change. What does Term insurance not mean or what it is not ? Cash Value: Unlike whole life or universal life insurance, term insurance doesn’t build cash value over time. This means you can’t borrow against the policy or receive a cash payout if you surrender it before the end of the term. Maturity Benefit: If you outlive the term of your insurance policy, you won’t receive a lump sum payment at the end. Term insurance is designed to provide coverage for a specific period, and there’s no payout if you don’t need it. Investment Returns: Term insurance isn’t an investment vehicle. While it provides protection, it doesn’t offer any potential for growth or returns. Guaranteed Premiums: While some term insurance policies offer level premiums, others may increase over time. This means your premiums could go up as you get older, even if you maintain good health. How to Know Your Sum Insured ? By annual income method: Determine your annual income: This includes your salary, bonuses, and any other sources of income. Choose a multiplier: The multiplier is a number that determines the amount of coverage you need. Common multipliers range from 5 to 10 times your annual income. A higher multiplier provides more coverage, but also increases the premium. Calculate the sum insured: Multiply your annual income by the chosen multiplier. Human Life Value (HLV) method is another popular approach to calculating the sum insured in term insurance. This method focuses on the financial value that an individual brings to their family through their income. How HLV works: Estimate your remaining working years: Determine the number of years you expect to work before retirement. Calculate your average annual income: Estimate your average annual income over your remaining working years, considering potential salary increases and promotions. Factor in inflation: Adjust your average annual income for inflation to account for the rising cost of living over time. Determine the discount rate: This is the rate at which future income is discounted to its present value. It’s typically based on the rate of return you could achieve on your investments. Calculate the present value of your future income: Multiply your adjusted average annual income by the present value factor, which is calculated using the discount rate and the number of remaining working years. Conclusion : To consult for the best plans and understand the requirement of Term plan needs you can reach us : https://wa.me/message/LC5W5ZNTPSJ5L1)