Buying a term life insurance is a smart thing to do in your early 20s. It is not only cheap but it also gives you a sense of protection. However, in most cases, the coverage does not change despite a change in lifestyle. It makes a lot of sense to review your life insurance cover. “Term life insurance offers protection to life assured by offering to pay the sum assured to the nominees in case of death. The coverage needs to be reviewed and enhanced as the income of the life assured goes up,” says Ajay Kinjawadekar, CEO, Moneysafe Financial Services. Here is how to go about it.
Why review term life insurance cover
Most smart insurance buyers end up taking a term cover in the range of Rs 10 lakh or Rs 20 lakh sum assured during their early work life. This fits the thumb rule of 10 to 15 times their annual income at the time of purchase. However, as they acquire new skills and change jobs, the income grows. After marriage, the number of dependents on the individual also goes up. Some of them end up buying houses using home loan. Home loans may require them to buy a life insurance to cover the loan amount in case of unfortunate death. But in that case too, the old policies come in handy. However, often, new purchase of term life insurance for a higher cover is avoided.
But it is not a wise decision, say most experts. “Term life insurance is expected to pay a sum which will support current lifestyle for the survivors in case of death of the life assured,” points out Kinjawadekar. If you do not review it and enhance it, it will fail to deliver, he adds. Let’s understand this with an example.
Is it inadequate?Ajay bought a term life insurance of Rs 20 lakh when he landed his first job with annual income of Rs 2 lakh. Over last five years, he got married and become father of a daughter. Now he earns Rs 6 lakh per year and has a home loan outstanding of Rs 18 lakh. In case of an eventuality, the term life insurance can pay off the home loan outstanding. But his family will be left with Rs 2 lakh and his investments if any. Here it is clear that the term life insurance is inadequate.
If you are one like Ajay, it is time to review your life insurance cover. While most experts recommend buying cover equal to 10-15 times of annual income, there are some other alternatives which can be considered. Let’s continue with Ajay’s case.
How much to buy?Ajay should buy life insurance cover offering sum insured which if invested at 8 percent should fetch monthly income equal to 80 percent of his salary. He has annual income of Rs 6 lakh. He has home loan outstanding of Rs 18 lakh. To earn Rs 480,000 (80 percent of the yearly income), Ajay’s family needs a corpus of Rs 60 lakh, if the same is parked at 8 percent rate of return. Add the outstanding liability of Rs 18 lakh. Ajay should buy a term life insurance policy with sum assured of Rs 78 lakh. A point to note is this calculation does not take into account any of his future goals such as his daughter’s education, which will remain unfunded if he is not around. He will have to account for the same. He may use a calculator to account for his needs in a better manner. Once you arrive at the right number, it is time to go shopping.
How to buy more of it?You may go to many insurance aggregator websites and check the insurance policies that are available online. Compare the benefits and premium payable. Also, do not overlook the qualitative factors such as claim settlement ratios and consumer complaints registered. Most good insurance aggregators offer this information along with policy quotes.
“Over a period of time the longevity has increased and the insurance companies are also competing with each other. Both these factors have ensured that the life insurance premium is going down,” says Saji George, co-founder of policylitmus.com, an insurance aggregator website.
If you have bought a term life insurance that allows you to increase the sum assured, you can tap the same option. These policies offer to raise the cover at a life event – be it a marriage or a child birth. However, they come with restrictions on how much more can be bought at such an event.
In most cases, you will require a new policy. “Given the low rates available on the new policies, it makes sense to buy a fresh policy offering adequate insurance cover,” advises Saji George. If you are in good health and have disclosed all material facts while purchasing new policy, you may stop paying premium for old policy after new policy arrived. If you are worried about the chance of insurance company refuting claim in the first two years of coverage, you may continue paying premium for old policy till the new policy completes two years.
Reviewing term life insurance coverage is a must and one should do it with utmost care. Be it a life-event such as marriage or child birth or a big loan, term life insurance coverage must be reviewed carefully. One should at least look at his term life insurance cover at least once in a five year, if not earlier.