Did You clone yourself?

Imagine a world where you could potentially buy a product that could replace you. Okay, not you precisely, because that would be a bit silly. But what if you had a replica version of yourself that could earn like you and make money like you. Wouldn’t you jump on that opportunity? Or maybe pay an annual fee just so you could hold on to this person? You probably would. And a term insurance product does just that. It is your financial replica and it comes alive when you die.

Continuing to my previous article -Let me explain. It is Called TERM PLAN!! When you buy a term insurance product, you pay a small fee every year or for a few years as I did, to protect your downside. And in the event of your passing, the insurance company pays out a large sum of money to your family or your loved ones. Think — 1 Crore or 5 Crore or even 10 Crore. Ideally, this money should replace you financially. It should support your family when you’re no longer the breadwinner. And unless you’ve deliberately misled your insurer whilst buying the policy, they will pay out the full amount the moment you die. Hell, even if you do mislead them, they have 3 years to uncover the fraud. If they don’t do it by then, they are mandated to pay out, no questions asked. So unless you commit suicide within one year of buying the policy or you died while committing a crime, your loved ones will get this money.

And while the base product is simple enough to understand, some key questions still remain and we will address that in the next section.

What is an ideal cover for your Term policy?

The first question should be obvious by now — How much money do you need to replace yourself financially?

It’s a tough question and let’s be honest — It is a bit subjective as well. But there are a few key things you have to remember here. For starters, your expenses. If your lifestyle demands a certain level of spending you will need to keep it up if you don’t want your absence to be felt. So if you’re spending 50,000 every month, your term insurance product should replace this income. And at that rate, you’re probably looking at a cover totaling 1 Crore. Let me explain why.

Think about what your family would do if they received this money. Assume they do the least sophisticated thing possible — which is probably the smartest thing to do as well.

Fixed Deposits!RIGHT THE SIMPLEST WAY TO PRESERVE MONEY.LOL;-)

At 6% annually, they will receive 6 lakhs each year. That should adequately compensate for your lost income. However with inflation, that 6 lakhs might start looking paltry very soon. So let’s try and beat inflation. Let’s assume the insurer pays you 2 Crores. That should get your family 12 lakhs each year. A pretty good sum overall and maybe good enough for the next 10 years. But what if you have a lot of financial obligations? Loans and that sort of stuff.

Then you should start looking at a higher cover. And while these are rough estimates, I hope you get where I am going with this. The final amount should generate enough cash flows for a reasonable amount of time to pay for all your family expenses (including EMIs) and also leave a little extra for your family.

What’s an ideal policy duration?

Remember. With a term insurance product, you keep paying your premiums until you die. Or the policy lapses. So there is an expiration date of sorts and it’s on you to decide how long you want to keep your policy. And you have to make this choice at the time of purchase. You can’t change it afterwards. So there’s a lot riding on this.

Once again, you are looking to replace yourself financially. But you are only doing it because — When you’re young, your family won’t have a lot of savings to fall back on. As you grow older, however, that changes. For instance, by 60, your kids will be all grown up. Your spouse will likely have a retirement fund to lean on and you won’t have many dependents to worry about.

So 60 could be a good place to start. But the insurance company knows something. The average life expectancy in India is about 70. So if you are intending to keep the policy beyond 70, know that your premiums will shoot up. Like a lot. And that means the sweet spot is somewhere between 60 and 70. Any number in that range should ideally serve you well.

Hoping this adds value to your life.Thank you.

#lifeinsurance #lifelogs #learning