What is term life insurance? Do I need term life insurance?

Author
Anmol Gupta

Do you have an uncle in your family who comes to your home like once in a year, takes money in the name of insurance promising you something like ‘Invest just INR 50,000 per year in this policy for 10 years, then after 20 years you will get INR 10,000 per month for your life time’. The uncle pitches this idea like this is the best thing in the world that can happen to you. I mean can you imagine INR 10,000 per month after 20 years?!!! How good would that be? I am sure you have got carried away by such policies. Also, most people think that this is what insurance is. Some of you are like “Wait no, if this is not insurance, then what it is? I thought insurance was the safest investment. Isn’t it? Won’t I get 10,000 per month after 20 years?“ Well, these kind of questions really make me sad about the understanding of insurances amongst masses.  I have personally interacted with more than 1000 people and have found less than 10 people who really understood the true meaning and purpose of insurance. Hence, it only made sense that I throw some light on it, yet again J

Statutory warning: Content ahead needs you to be strong hearted and consider the harsh realities of life.

The Problem

Consider following scenario in your life.

You got married 4 years back to the love of your life. You went to Mauritius for your honeymoon, did adventure sports, had fun and came back. You are living in an overcrowded metro in India, where your daily dose of adventure is to beat the traffic and reach office in time. You really feel like a Spartan when you save yourself from the crazy people who don’t follow any traffic rules. It’s been two years and now you have been blessed with a kid as well. It has truly change the meaning of your life. Now you really understand what love at first sight means. You are already making plans of how will you raise your kid. You want to give her the best education you possibly can. You also want to give her the freedom to pursue non-conventional career paths, the freedom you couldn’t have for yourself. The life seems so beautiful at this stage with a new sense of purpose. You often see news items like 200 people died in a plane going to Indonesia, a 30 year old dying in road accident on the street you pass from every day, a friend of friend getting cardiac arrest at the age of 32 etc etc. You feel bad about those people for a moment and then you move on with your life. Subconsciously you assume that these things won’t happen to you.

But, what if you are the next person to die in that road accident the next day? Who will take care of your daughter? How will she get the best in class education that you planned for? Forget education, if you are the sole bread earner in the family, your kids, spouse or your parents won’t be even able to live their daily lives normally. Also, it’s not just about people in your family who are financially dependent on you. What if you had taken a huge loan to buy your dream house? In your absence, the liability to repay that is going to come on your family. Along with the emotional trauma, the financial set back is going to make their lives hell.

I really wish well for everyone, but such things are not in anyone’s control. Such things can happen to anyone and we have to accept it.

The Solution

Well, what if your daughter could still get that world class education you planned for even in your absence? What if your family could still lead their lives comfortably, at least financially? What if your family didn’t have to repay the loan that you had taken? Sounds good, right? It is very much possible. And as you might have guessed, Term Life Insurance is the solution to all these uncertainties of your life. Well, now you might say that you already have got LIC’s insurance and so you are covered for these uncertainties. Trust me, 99% of you thinking so do not have the right kind of insurance. The insurance you have got is not term life and it’s not gonna be of much help. Well then, what is Term Life Insurance? Keep reading.

What is term life insurance?

So, taking the case I considered at start. Assuming you are 30 years old. Assuming that you will be working for next 25-30 years is a fair assumption. Now, if everything goes smoothly, you will be able to fulfil all your financial obligations i.e. education of your daughter, taking care of your family and repaying the housing loan. But, in an unfortunate event of your death anytime from the age of 30 to 60, some of your financial obligations might get left unfulfilled. Let’s say your housing loan is Rs. 50 Lakhs, your daughter’s education will cost another 30 Lakhs, and your family is going to need another 50 Lakhs for their day to day expenses in your absence for next 20 years (Just believe it for now J). Now, you need to buy a term life insurance policy wherein the insurance company will promise to pay Rs. 1.3 Crore (50 + 30 + 50) to your family if you die. Also, it’s not like even if you die at the age of 85, the insurance company will pay the money to your family. While purchasing the policy, you are going to decide the time period or the ‘term’ (hence ‘term’ life insurance) for which you are insuring yourself. The ideal term for the policy are the years for which you are going to be earning. In this case, it would be 30 years i.e. from the age of 30 to 60. So, if you die between the age of 30 to 60, your family is going to get Rs. 1.3 Crore. And, what would the insurance company get in return to insure your life? It’s called as your ‘Insurance Premium’. For the complete term of your policy i.e. 30 years, you will be paying some money eg. Rs. 10,000/- per year to get a coverage of Rs. 1.3 Crore.

Now, as some of you might be thinking, what would happen after the age of 60? Well, nothing happens J your policy term will be over and you will no longer be insured. Also, you don’t need to be insured as by that time you would have retired and you would have fulfilled all your financial obligations. So, you are not going to get any ‘return’ post the policy term i.e. after 60 years of age in this case. Googly? This is where some people who have put some thought into term life insurance, get stuck at. People say that what’s the use of this insurance if I am not getting anything in ‘return’? Well, say it with me, and aloud. INSURANCE IS AN EXPENSE, NOT AN INVESTMENT. Let’s say it again. INSURANCE IS AN EXPENSE, NOT AN INVESTMENT. Okay,one last time. INSURANCE IS AN EXPENSE, NOT AN INVESTMENT. So, life insurance is an expense to cover the risk of loss of your life. It is not supposed to give you returns. To get returns, you invest your money not buy insurance policies. Term life insurances are very cheap. You pay a very small yearly premium to get a huge coverage. Eg. Rs. 10,000 per year to get a coverage of Rs. 1 Crore in some cases.

Who needs term life insurance?

As you might have understood, if you have people who are financially dependent on you or if you have liabilities that your near ones might have to fulfil in your absence, you need term life insurance. If you don’t have any dependents and liabilities, you don’t need term life insurance. As simple as that.

But, you already have some insurance which also gives ‘returns’? Isn’t that better?

As I said earlier, that is not term life insurance. No, it’s not. It’s some kind of a hybrid plan which gives you both returns and insurance, but does justice to none. I’ve written about it in detail here: http://qr.ae/TUhRpr.

Conclusion

It’s not wise to live in an illusion that bad things won’t happen to you. Even worse than that is you knowing the uncertainties of your life but having a wrong kind of product for that i.e. hybrid insurance product. Term life insurance is meant for you if you have people who are financially dependent on you or you have got liabilities like loans to fulfil even in your absence. And once again, INSURANCE IS AN EXPENSE, NOT AN INVESTMENT.

If you want to understand how much insurance coverage you need and which policy is best for you, book a free call with us. It varies from person to person.

About the Author
Anmol Gupta
Anmol is CEO at 7Prosper. He is SEBI Registered Investment Adviser, with expertise in Finance and Technology domains. Anmol is committed to help people achieve their financial freedom.

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