Term Insurance: Investment or Expense?

Jul 15, 2018 | 8 months ago | Read Time: 3 minutes | By iKnowledge Team

term insurance and investments

Term insurance is a life insurance product offered by companies, which provides financial coverage to a policy holder for a specific time period. In case of death of the insured person, the policy benefits are paid by the company to the beneficiary. Though term life insurance products do not provide any returns, they offer the most important thing, a cover for your life. If an unfortunate incident takes place, it gives a lump sum amount to your family. In a way, by buying term insurance, you are ‘investing’ in securing your family’s future, so that they can take care of all their financial needs.

 How does it work?

When you buy a term life insurance policy, you pay a certain amount to the insurance company regularly. This regular pay-out is known as the policy premium. Over time, the insurance company collects this premium and uses this amount to provide financial security to your family in case of an unfortunate event. Aegon Life’s iTerm Plus provides your loved ones with adequate protection, if the worst were to happen.

Investing in term life insurance

A term plan is the most basic form of life insurance. The premiums paid towards a term policy are used exclusively to cover your life. This implies that there are no external returns earned from such policies. However, the comfort, peace of mind, and the financial security that it provides in your absence make it an important investment. If you are 38, and a non-smoker, you can buy a term plan for a premium of Rs. 507 per month, and get a sum assured of Rs. 25, 00,000.

The most accurate way to calculate your life cover is to use the expense approach rather than the income approach. The difference is that it gives you a bare minimum amount of life insurance cover you should have, rather than a range.

Basic Information required for calculation of your life covered

Suppose, you have current monthly expenses worth Rs. 20,000. Annual income is Rs. 7, 00,000 without tax deduction. Assumption of inflation index is set at 6%. If you increase or decrease it by even 1%, there is a drastic difference in the calculation. Your current age is 32 years. Your retirement age is say 60 years. Number of years to go before retirement remain 28 years.

There will be large expenses in your life. For example, these could be higher education expenses for a child after 12 years or marriage expenses. Apart from these, there are medical expenses and other household expenses which cannot be overlooked. If you have more than one child, then the expenses will increase.

For example, let’s take the total large expense requirement of you at Rs. 22, 00,000.

The assumption of your existing savings is calculated at Rs. 14, 50,000. Let’s add only financial assets such as bank balance, FD, RD, mutual fund, bonds, shares, and stock options to achieve the total.

The assumption of your existing liabilities stands at Rs. 16, 75,000.  Let’s add all outstanding loans. For example, you have taken a housing loan of Rs. 30 lakhs, 6 years ago and as on date, the principal amount of Rs. 27 lakhs is still outstanding. Similarly, add auto loans, personal loans and other credit card balances if any.

The assumption of existing life insurance cover is as follows: If you have already taken some life insurance earlier and the policies are still continuing, add up the life cover (Sum Assured, not the premium) of those policies and total them.  Let’s assume that is Rs. 8 lakhs.

So, life insurance cover required for you will be (20,000 * 12 *(1- (1.06)^28)/(1-1.06^28) +22,00,000 ­- 14,50,000 + 16,75,000 – 8,00,000))= Rs. 1, 78, 71,747..i.e. Rs 1.79 crores, or about 25 times the current income in this example.

Investing in term insurances is good for the long run. This investment may not be like the traditional return yielding method, but it is the safest option when you are looking to have a secure future for you and your family. Given the uncertainty of life and the variability of our savings, having a term life insurance plan is like having a safety net. The returns received in turn for the money invested is in the forms of life cover and peace of mind.

Advt. No.: IA/Jul 2018/4165


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