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Why Splitting Term Insurance Plan Can Optimize the Cover and Cost?

Over the last eight months, the pandemic has surely made an impact not only on the economy but also on the lives of the people. Meanwhile, people have also understood the importance of insurance and this fear has genuinely pushed people to buy the insurance that suits the budget and fulfils the requirements.

The Indian insurance industry has also witnessed the rise in the demand of the term insurance plans and the collection of premium. It took the pandemic to make people understand the importance of buying insurance. For those who are still unaware do not wait for another pandemic because we are already facing the toughest of times.

When it comes to financial planning, a term insurance plan is the fundamental requirements as it will provide cover against the critical risk that is life itself. In this article, let us discuss the term insurance plan briefly.

Who in the Family Needs to Buy the Term Plan?

The breadwinner of the family must have the term insurance cover. Nobody knows what will happen tomorrow, therefore to protect the financial interest of the family, in case the primary earning member is not around, the right term insurance plan will take care of the needs. The idea is simple anyone who has immediate dependents and any liabilities, must have the term insurance plan.

Do not wait for the right time or age to buy the term insurance plan. You could start when you have just started working and likewise keep adding to the cover on the premise of additional requirements.

Well, starting early implies a lower term insurance premium for the same cover. For instance, Mr Khanna is 30 years of age and buys a Rs 1 crore term plan for 70 years of age then the annual premium would somewhere be Rs 12,000. Now, the premium will vary if Mr Khanna buys the same plan at 40 years and will end up paying Rs 21,000 and so on.

What Should be the Term Insurance Cover?

The best term plan is the one that covers the liabilities and important future expenses like education of the child, wedding and everyday living costs of the family. Let us assume that you have a Rs 50 lakh home loan with the principal outstanding amount of Rs 40 lakh, a Rs 3 lakh car loan and another Rs 20 lakh for the education of the child. So the term insurance plan should cover it all till you turn 60 years of age. This will be apart from the cover sum that would provide for household expenses after you are not around.

Therefore, you should have a term cover till 60 years of age and have another separate plan to provide for the spouse’s financial independence until 70-75 years of age. Breaking the term insurance plan into two that is one till 60 years of age and the other till 70-75 years of age would not only enable to optimize the cover but the cost as well. In case, an individual is beyond 60 years of age, then a cover against the child's education, marriage and the home loan will not be required as most likely these objectives by this time would have been met.

How Long the Cover Should be Taken For?

The cover needs to be for the years when you have liabilities and have additions in a family. The term insurance plan should provide the cover until your child becomes financially independent and you have substantial retirement corpus and the financial needs are met. In case you think that you do all of these by 60 years of age, then ideally you would not need the plan beyond 60 years of age.

The term insurance plan should never be confused with the need for a health plan. Alongside the right term plan, it is important to plan for retirement as well. When you have sufficient retirement corpus to enjoy the golden days of life you would not need the term insurance plan beyond 60 years of age.

How Does This Optimization Help to Save Money?

Let us just say that you are 35 years of age presently and looking forward to a Rs 1.5 crore term insurance plan until 75 years of age. The term insurance premium would be somewhere Rs 21,000 every year for the next forty years that is aggregating to a sum of Rs 8.4 lakh.

If you intend to buy a term insurance plan for Rs 1 crore until 60 years of age and the other plan for Rs 50 lakh until 75 years of age, then the term insurance premiums will be Rs 11,000 for term plan of Rs 1 crore. And for the sum of Rs 50 lakh would be somewhere around Rs 8,000 respectively and the adding to the complete premium outgo of about Rs 5.95 lakh.

In both cases, you will obtain the cover of Rs 1.5 crore until 60 years of age. As the need of the term insurance plan is reduced and likewise limited to some cover for the needs of the spouse, by splitting the plan, you will reduce the premium outgo noticeably post-retirement.

The income post-retirement is limited, and people majorly depend upon the savings. Therefore, it is important to optimally spend limited monthly income.

The Bottom Line

Do not wait for another pandemic; the financial well-being of the family is extremely important. The best term insurance plan will protect your family by offering a high cover at a cost-effective premium. No matter what, the family will be able to maintain the present lifestyle and take care of the liabilities even in your absence.

Written By: PolicyBazaar - Updated: 07 January 2021
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