Insurance should be 12-15 times the insured's annual income
LIFE can be very unexpected. Therefore, financial experts recommend individuals who have dependants, to buy a term insurance policy that will provide financial support to the dependants incase of his death. Although the amount of insurance cover depends on the liabilities of a person such as loans taken by him, living and future expenses, the insured's age, occupation, number of dependant children, assets he holds and other factors, it should be at least 12-15 times the insured's annual income. Term insurance policies do not offer any maturity benefits and, are therefore, cheaper than the regular policies.
There are various types of term plans in the market.
Here is an overview on the most popular category of term plans available and when should one can consider a particular type of term plan:
■ Pure term life insurance plan: In this plan, the policyholder is covered for a specific period. In case he dies during the term, the policy will pay the cash benefits to the beneficiary. However, in case the policyholder survives the tenure of the policy (and does not renew the policy), the coverage will get ceased. If the policyholder dies after the coverage ceases, the beneficiary will not be paid any benefits.
Life insurance companies offer the options of reducing term cover, increasing term cover and term convertible option in a pure term insurance policy.
■ Term insurance plans with return of premiums: A large segment of individuals hesitate in buying term insurance just because they would not get anything if they survive the policy tenure. For such customers, insurers offer an option of return of premiums. Should you survive the term, you get back all the premiums you paid. It could be with or without interest. However, these plans are expensive, in case you want to buy a higher cover say Rs 50 lakh and above.
Term convertible policy: This is a combination of a pure term policy with the option to convert the policy in the middle of the tenure into a whole life plan or an endowment plan. In such a case, all the premiums paid towards a term plan are converted towards an endowment or a whole life plan.
Again, such term plans also costs more as this involves a greater risk for the insurance company.
A term convertible plan is suitable for people in their 40's who expect their income to increase. Such customers can convert their plan into a legacy plan.
Mortgage-reducing term assurance plan: This category of term plans is targeted at those who have taken home loans. The insurance amount is equivalent to the outstanding loan amount and progressively decreases in the same proportion as the loan amount is paid back through regular equated monthly instalments (EMIs). Such a term plan helps a bank recover the loan amount in case the borrower dies.
Return of premium types of term plans should not be considered as they are very expensive if you want to buy a higher cover. People should separate their insurance and investment needs and stick to a pure term plan. The second best option would be to buy a term plan with increasing life cover as you require more insurance when you are young and less insurance as you grow old.
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