A life insurance policy is a contract between the policyholder and the insurance company that authenticates the payment of a death benefit to the nominee upon the death of the policyholder.
There are many types of insurance plans available for the customers and some of which are Unit Linked Insurance Plans, Term life insurance, and Endowment plans. Each of these plans has its own benefits. However, insurance plans can be tailor-made according to the needs of the policyholders and their families.
A life insurance company pools together the premiums of various policyholders and pays off the death benefit claims in the event of unforeseen deaths of an insured.
The owner of the policy is responsible for paying these premiums at defined time intervals. A beneficiary or a nominee is a person that the sum assured is awarded upon the passing of the policyholder.
The insurance company makes a profit that is the difference between the premiums that are paid and the benefits that are claimed.
A term insurance plan that provides guaranteed death benefit of Rs.1 Crore during the period of the policy tenure to the nominees upon the passing of the policyholder.
The ideal assumption is that the insured amount should be 15 to 20 times of the policyholder’s yearly salary- if he/she is the sole earner in the family. This should be adequate to run the household in the absence of the policyholder as well as pay off any house or education loans that are pending. However, these calculations do not take into account all the liabilities of the policyholder. A lot of forethought should be put into it.
This calculation accounts for inflation of 6-7% every year for the coming years as well.
An average salary earner who falls within the age group of 30-35 can opt for this plan to secure his/her family from the uncertainties of life. This plan is more appropriate if the policyholder is the sole earning member in the family and if the family income falls in the Rs. Five lakhs to 7 lakhs bracket. It is a smart decision to ensure that the cover lasts well into the policyholder's '60s.
There are quite a few tools online that would help in the determination of how large the insurance cover should be. These help to give policyholders a clearer picture. An insurance agent can also help to take one through the overwhelming and tedious process and assist in choosing appropriate riders. Retirement plans are also to be considered at an early age not to estimate the costs but to come up with realistic figures.
If one cannot make large annual premium payments, additional policies can be bought down the line when there is more financial stability. This helps to achieve any set of financial goals. Any of the smaller policies can be surrendered in the case of a financial emergency- instead of surrendering a large policy which may result in large withdrawal penalties.
Premiums for term insurance of Rs.1 crore for an average salary earner in their mid-thirties with a good health record and no known disabilities:
These rates can differ based on the medical history of the policyholder and the additional riders required. The two important questions to ask to oneself before purchasing a term policy are - how big the cover should be? And how long the term should be?
However, with this being said, it is important to understand that Rs. 1 crore might not be adequate to cover the needs of a family after accounting for inflation. Rs 1 crore will not seem like a large amount of ten years from now. A higher cover may at times be required depending on the financial stability of the family. Rs 1 Crore may seem like a big amount now, but it does not always cover all the loses. Policyholders should be aware of the face value of the policy, premium amounts and the length of the cover before they sign the dotted line.
People do not like talking about life insurance plans because nobody likes discussing death, but it is important that the worst case scenarios be considered to make well-informed decisions. Term life insurance is a strategic financial instrument and an important part of any long-term goal. Professional financial advisors would help to make informed decisions and avoid unnecessary strain on one's finances.