If you are the breadwinner of the family, you take care of their financial needs and provide them with all the comfort in life. You manage money with the utmost care. You also have a life insurance policy so that your loved ones are taken care of in case of your ill-timed death. But do you know how much money the policy will pay in case you actually die? I would not be surprised if you do not. You can go check and I will wait.

If you have one of the mainstream policies (endowment or money back), I would bet that the Sum Assured (SA) is in the tune of ₹5-10 lakhs. This bit is important so let’s go through it once more, in plain English: if you die, all that your family gets is ₹10 lakhs.

At the current rate of monthly expenses, for how many years do you think your family will be able to manage with ₹10 lakhs? 2, 3, 5 years? What happens after that? Is that enough to send your kids to a good college? Will your spouse be able to afford a comfortable life in old age? How will your parents’ health expenses be taken care of?

The insurance coverage amount should be large enough that your family would not need to worry about money, just like had you been alive. To take care of their needs for 20+ years, you need to have a cover of at least 15-20 times your annual expenses. The required amount goes up if you have more liabilities like loans, and reduces if you or the family have other investments.

I guess you never realized that your life insurance policy would not be of much help in case of your actual death. It’s not your fault though: the agent that sold you the policy was more interested in lining his/her own pockets rather than helping secure your family’s future.

Now that you are wiser, let us explore how you can avail proper coverage and rectify the situation. Enter term life insurance.

Term Insurance

You may have heard of term insurance policies but may not have given them much thought. Term policies are not much different from the one that you already have. There is one important distinction, though:

If you do not die within the policy period, you do not get anything at the end. Not even your premium amounts, let alone any interest.

This may seem like throwing money down the drain but it is not. In most policies, which mix insurance with investment, only a tiny part goes towards the life cover. The insurance company invests the rest and reaps handsome profits. These gains allow it to offer complete money back guarantee, as well as additional “assured” returns. Sold as no-brainer deals, such schemes provide abysmal life coverage and measly returns, at much higher premiums. The company and its sales agent get richer at your expense.

1000x coverage

Term insurance only covers the risk of you dying too soon; there is no forced investment bolted along. That you do not get any money back at the end is what allows term plans to be so cheap. This lets you avail a much higher coverage at a fraction of the usual premium amounts. Term plans providing ₹1 Cr of sum assured cost as low as ₹10K a year — a death benefit of nearly 1000 times for each rupee paid as premium!

Tax savings

Like other insurance policies, term plans too qualify for tax benefits. Given the much smaller premium outgo, the tax savings are modest. Typical policies, with much higher premiums, are eligible for larger deductions. Large tax savings makes for a tempting sales pitch that traps too many. They make you throw away ₹100 to save ₹20 on taxes.

Why aren’t term policies more common?

Insurance companies do not sell term policies aggressively because they aren’t that profitable. Given the tiny premiums, their sales agents can’t make enough commissions off them either.

The future of your dependents depends on you purchasing adequate life cover. Typical insurance schemes intermix life cover and investment and don’t provide enough protection. You can remedy the situation at minimal cost by buying a term plan, so get one today!