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We often hear people say life insurance is a must for every earning person. However, no one rule applies to all. It is not uncommon for a working married couple to not have kids or their parents having their pensions
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When it comes to life insurance, most people prefer buying investment-linked insurance plans so that if they survive the policy term, they can receive some amount in return against the premium they pay. This is a myth that goes against the basic purpose of insurance, which is risk management at the lowest possible cost. Similarly, there are a lot more myths about term plans that you must know. Below are six myths busted for you:
1) Term plans are wastage of money
Term plans, which provide financial protection to your family in case of your untimely death are not that popular because if you survive the policy period, you get nothing in return. However, in reality, the higher protection that you get at much lower cost has much higher value in managing financial risk for your family. At a nominal cost, you are assured of complete well-being of your family in your absence.
"These are a pure protection tool and should be considered as such. Can you expect a security alarm to act as a doorbell? Similarly, term plans should be considered as a protection tool, not as an investment one," points out Dhirendra Mahyavanshi, Co-Founder, Turtlemint.
The nominal premium that you pay is nothing against the sense of security a term plan offers. This sense of security enhances your risk appetite for investment which can help you invest in equities and generate a much higher return for your long term life goals.
2) Everyone needs life insurance
We often hear people say life insurance is a must for every earning person. However, no one rule applies to all. It is not uncommon for a working married couple to not have kids or their parents having their pensions. If nobody is dependent on your income, you don't need insurance. Term plans by its concept are meant to provide financial assistance to only your dependents in case of your untimely death. Similarly, if your spouse or children are financially independent or there is sufficient asset to fall back upon, you may not need life insurance.
Insurance cannot be your second financial priority which comes after investment. The financial protection of your dependents should be your priority the moment you start earning. Since age is a major factor to determine the value of insurance premiums, it is obvious to conclude the sooner you buy the policy, the better. Once the lower premium is fixed at a younger age it will remain fixed for the entire term and you get this benefit for the entire term.
However, it doesn't mean that you buy it in your twenties when you are still studying or if you are single and have just started the job. If your family is not dependent on your income for financial support, you don't need it. The only exception to this is if you have taken education or any other personal loan. "If you have education loan running, you must have insurance attached to it even while you are studying," says Dheeraj Sehgal, Chief Distribution Officer, Institutional, Bajaj Allianz Life.
4) Once bought you can't increase the cover
You can, and you must increase your cover with changing life responsibilities and growing income. There is a plan called increasing term insurance in which you can increase the policy coverage at pre-defined intervals in the future. The terms and conditions for premium payment may vary depending on your requirement and a particular insurer. "I strongly recommend people in their twenties or early thirties to buy a term plan with cover enhancement option so that you keep on adding cover as your human life value grows with marriage, childbirth, or other financial liabilities," says Sehgal of Bajaj Allianz Life.
If you haven't bought the increasing term plan, you can either top up the existing policy or buy an additional policy to enhance your life cover when needed. "If a policyholder gets married and/or has a child, he/she can increase the sum assured during the tenure of the policy. This increase would result in an increase in the premium and the increase is allowed from the next renewal date," says Mahyavanshi of Turtlemint.
5) Life coverage cannot be reduced
Just like increasing the term plan, you also have the option of decreasing the term plan. Such plans are linked to an asset such as a house or car that you have bought on loan or education loan. Just as the liability on your loan decreases, your sum insured will also decrease on a monthly or an annual basis. However, the premium will remain constant. Such plans are typically cheaper than the standard term plans.
There are many riders in term plans to customize your coverage as per your needs. From buying critical illness, disability benefits to waiver on insurance premium to insurance for the whole life, there are multiple add-ons offered on term plans. "Riders are optional add-ons and can range from the ones accelerating the payouts of the base or offering additional cover. Certain riders do offer waiver of premiums under the base plan too, wherein the benefits of the base plan continue even when the person is unable to pay the premium," says Samit Upadhyay - Chief Financial Officer and Head Product, Tata AIA Life. Accidental benefit rider makes your policy eligible for an additional payout if death happens by accident, while disability and critical illness riders ensure you receive some money if you lose your income due to critical illness or disability. "Thus, coupled with life cover, these riders extend protection against all three risks - death, disease, disability," Upadhyay adds.
