Begin with Strength: The Importance of Term Insurance in Initial Financial Planning!

What is “Term Insurance” all about ?

Term insurance is a type of life insurance that provides coverage for a specific period or term, typically ranging from 5 to 30 years. It offers a death benefit to the beneficiaries if the insured person passes away during the policy term. Unlike permanent life insurance policies, such as whole life or universal life insurance, term insurance does not accumulate cash value over time.

The importance of term insurance lies in its primary purpose, which is to provide financial protection to the policyholder’s loved ones in the event of their untimely death. Here are some important situations that you will have to look in to and think in great detail !

1. Income replacement: If you have dependents who rely on your income to cover their living expenses, term insurance can replace your lost income in the event of your death. It ensures that your family can maintain their standard of living, pay bills, and meet financial obligations even in your absence.
2. Debt repayment: Term insurance can be used to cover outstanding debts such as mortgages, personal loans, or credit card debts. This prevents your family from being burdened with these financial obligations if something were to happen to you.
3. Education expenses: If you have children or dependents who plan to pursue higher education, term insurance can help fund their educational expenses, ensuring they have the financial resources to fulfill their goals.
4. Funeral and final expenses: The cost of funerals and other end-of-life expenses can be significant. Term insurance can provide the necessary funds to cover these costs, relieving your family from the financial burden during a difficult time.
5. Business continuity: Term insurance can be vital for business owners. It can be used to safeguard the business by providing funds for buy-sell agreements, ensuring the smooth transfer of ownership in the event of a business partner’s death.
6. Affordability: Term insurance is generally more affordable compared to permanent life insurance policies. The premiums are lower, making it an accessible option for individuals looking for affordable life insurance coverage.

It’s important to note that term insurance only provides coverage for the specified term, and if the policy expires without a claim, there is no payout or cash value. However, it offers peace of mind during the years when financial obligations and dependents’ needs are typically higher, making it an essential tool for protecting your loved ones’ financial well-being.

Do not confuse it with endowment policies , for more read hear

Tailoring Your Protection: Determining the Ideal Term Insurance Coverage Based on Your Financial Journey

To calculate your ideal term insurance coverage, follow this straightforward formula: add up the following elements and multiply the total by 1.2 for an added layer of security.

• Living expenses per year X Number of years for next generation to start earning
• Total current debt
• Expenses for children’s education

Term Insurance Required = 1.2 X { (Living expenses per year X Number of years for next generation to start earning) + Total current debt + Expenses for children’s education}

Now, let’s illustrate the formula using an example and present the calculations in the form of a table:

Example:

Assuming the following values: Living expenses per year: 7 Lakhs, Number of years for next generation to start earning: 16 , Total current debt: 50 Lakhs, Expenses for children’s education: 30 Lakhs.

Factors	Amount (in Crores)
Living expenses per year	0.07
Number of years for next generation to start earning	16
Total current debt	0.5
Expenses for children’s education	0.3

Using the above table, let’s calculate the ideal term insurance coverage:

Term Insurance Required = 1.2 X { (0.07 X 16) + 0.5 + 0.3 } = 2.3 Cr

It is important to Note that if you have this amount in the form of Fixed deposits , safe assets like AAA Corporate debts or Gold then you do not need this term insurance , but when you are starting from 0 in your career and want to play it safe this is crucial.

By utilizing this simple calculation method and considering crucial financial factors, you can determine the appropriate term insurance coverage for your specific circumstances.

Completing the Picture: Important Factors to Consider in Your Term Insurance Policy.

• Keep your dependents informed about the term insurance you have purchased and educate them about the process to make a claim.
• “While comparing various term insurances available in the market, don’t just opt for the one with a lower premium. Consider factors such as the average claim trend, waiver of premium on disability, and solvency ratio of the insurance provider before making your decision.

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Disclaimer: This blog post is intended for informational purposes only and should not be considered as financial advice. Always conduct thorough research and consult with a qualified financial professional before making investment decision.