Term Insurance: Why You Need It And What It Is Not.

Ok, so I am not going to sell you a life insurance investment policy. If someone already did, then it is a possibility that you’ve been had!! Please sit with an excel sheet and do your own calculations to see whether the returns promised in the policy match up to your expectations. Now, this post is specifically about Term Insurance. 

Term Insurance  = pure & simple insurance, if you live through the period the insurance company keeps the money, if you don’t, your nominees get the money. That’s it!

So, why do you need it, how much do you need and for how long ?

Why you need Term Insurance:

Your family is used to a particular lifestyle. This is largely made possible by your income (and any other earning member). 

Let me put it bluntly. In the worst case, if you are no longer able to provide the same lifestyle, because of a mild case of death. It will be bad enough for them to deal with your loss, let them not bear the brunt of financial consequences. The term insurance is to make sure your family is able to enjoy the things that you want for them. I hope that is put simply and bluntly enough for you.

YOU NEED TO GET TERM INSURANCE for the welfare of your family. 

How much insurance is enough:

This is simple, figure out your stage of life, what big events are yet to come – kids education, marriage, parents old age needs. What would you want to leave behind for the spouse as a means of livelihood? It is reasonably simple maths – put together the numbers.

The number is usually 6-8 times your current annual earning if you are at an early stage – small kids etc. This is not a number to keep a low count, it is a number to be conservative about and keep in mind inflation and external factors. If in doubt, go big, get 8x your current annual CTC. 

Remember to factor in current debt, those home loans and car loans won’t pay for themselves.

What is not Term insurance  ? 

Anything that masquerades as an investment is not term insurance. Please don’t get taken in by salesmen telling you to buy a particular investment + insurance schemes. Make sure you are able to distinguish investment and insurance as two distinctly separate things.

If you are looking for investment, evaluate with other investment opportunities. But when you are buying insurance, focus only on insurance. The purpose is to provide your family with the same lifestyle in your absence. 

Also, watch out for the ‘premium back’ term insurance schemes, they promise to give your premium amount back to you in case you survive. When I looked at these, the premium difference seemed to be 3x compared to simple term insurance. Not worth it in my opinion. But do your own calculations.

For How Long?

This is an interesting debate. My opinion is that you need this till your financial future is not completely secured. I have currently taken Term Insurance till age 60. Like most people in my age group by then, our kids should be settled and we should be in reasonable financial shape. In case you feel secure about your financial future earlier than planned you can always stop the insurance.

I am now seeing products that offer term insurance till 100 years, till death etc. Personally, I think that is totally unnecessary unless you are a professional who will keep making money till the last day. Mango people like us are unlikely to benefit. 

This is relevant to India of course. We don’t have something like inheritance tax (at least not right now). In the US I have seen articles recommending a full life term insurance that can be used to pay off the inheritance tax, which makes sense. But not relevant for us here. 

My recommendation is to plan till the point where you are sure about financial security and then maybe add a few years for luck. If you hit your goals earlier you can just stop the insurance. Of course, every earning member needs term insurance.

Bottomline: You need term insurance and that is simple term insurance with no gimmicks attached and you need it for as long as your financial future is work in progress. 

You can also read here for the very basics, ten fundamentals and how it started for me.