Why term insurance is a must in financial planning

Individuals up to the age of 40 years need a life cover equivalent to 20-30 times of their annual income

By Amit Palta

The Covid-19 pandemic has brought in sharp focus the need for a good financial plan which can secure the family from risks to both lives as well as livelihoods. Every investor has to remember that even the soundest financial plan requires the strong foundation of a term insurance plan. A term plan makes a payout only on the policyholder’s death. There is no savings component in it. So, how does it help?

Income replacement
To better understand how term insurance plans, work and act as income replacement, let us take an example of a married couple Rahul, a 30-year-old entrepreneur ,and his wife Shweta, 28-years-old and a homemaker. The astute planner that Rahul was, he had taken a term insurance plan and named Shweta as the beneficiary.

Unfortunately, Rahul had an untimely demise. Though in great distress, Shweta didn’t have to worry about the loss of a regular income as the claim proceeds from the term insurance plan came to her rescue. Since Rahul had taken adequate life cover Shweta had the necessary financial resources to continue with her life as well as the financial savings plan.

Life cover
So, how much life cover is adequate? Here one should apply the concept of Human Life Value (HLV). As per this, individuals up to the age of 40 years need a life cover equivalent to 20-30 times their annual income. For individuals in the age bracket of 40-50 years, a life cover of 10-15 times annual income is recommended and for individuals above 50 years the life cover should ideally be five times the annual income.

Ideally, the life cover should continue till retirement at least. Individuals should assess the family’s lifestyle, responsibilities such as children’s education, retired parents, etc., outstanding financial liabilities such as a home or personal loan, and ensure the life cover is sufficient to cover all these in case of any untoward incident. At the time of purchase the life insurance company may require customers to undergo medical tests; this is done to arrive at the appropriate premium to be charged.

There have been several innovations in term plans. Today customers can purchase term insurance plans with built-in critical illness benefits. This benefit is particularly important as lifestyle related ailments are on the rise due to increased levels of stress, leading a sedentary life, lack of proper dietary habits, etc.

The writer is chief distribution officer, ICICI Prudential Life Insurance