I’m a 37-year-old director at a prominent multinational corporation in Delhi. I have liquid assets that I’m looking to invest to secure my family’s financial future, especially that of my 4-year-old daughter. I am also considering a sound term life plan for an added layer of security.
Will a term plan help cover my family sufficiently even several years down the line? If so, can you help me arrive at an appropriate sum assured? I’m also looking at adding features that can make the plan more comprehensive. Are there any other crucial aspects I should be aware of regarding tax saving, and anything else to provide comprehensive protection for my dependants?
Term insurance is the foundation of financial planning, therefore, a non-negotiable investment to secure your family’s future. The rule ofthumb for buying term insurance is to factor in long-term viability and so an adequate life cover or sum assured should help your family continue the same lifestyle and provide for your child’s education even several years from now.
Considering that you hold a management position in your organisation, do check whether you fall under the high net-worth individual (HNI) category. The term insurance industry in India today caters effectively to each and every segment and thus provides high life cover to HNIs, with most insurers offering a cover of up to ₹20 crore. Given the high stakes HNI customers come with, a term insurance of at least ₹5 crore and above is crucial to adequately secure dependants.
Besides, term insurance prices are unbelievably inexpensive in India. You can get a sum assured of ₹5 crore at a monthly premium of ₹3,000-3,500, which costs even less than a family outing! One should follow the rule of taking a cover that is approximately 10 times of their annual income. Don’t only think about the current disposable income but also outstanding liabilities, rising inflation and future responsibilities.
Often, people consider current liquid assets as a replacement for term insurance. However, this flawed approach does not suitably take into account any of the above mentioned factors and hence falls short when you need it the most. You can cover your family till you retire (60 to 65) since your financial obligations will be over or you can opt for higher coverage (75 to 80) as well if you want to leave a legacy amount for your family.
There are several riders that can enhance your safety net. Most plans come with a free rider of early payout on terminal illness, but there are other beneficial riders that you can add at a reasonable cost. For instance, with Waiver of Premium on Critical Illness/Disability rider, no future premiums have to be paid and the life cover stays intact. This is available as a free add-on in most of the plans and otherwise available at minimal amount. Also, Critical Illness Benefit rider gives you a lump-sum payout (as decided while buying this rider) immediately upon diagnosis of any critical illness (listed by the Insurer). This proves to be especially useful as an income substitute during times of reduced or no income due to inability to work.
Coming to tax benefits, the prevailing tax rules apply uniformly to all investments, which means you will be eligible for tax exemption of up to ₹1.5 lakh for premiums paid towards term life policy under Section 80C. The death benefit from the policy shall also be tax exempt under Section 10 (10D).
The writer is Joint Group CEO, PB Fintech