A term insurance cover is supposed to protect your family financially in case you are no longer around. The plan is supposed to save them from financial dependency in your absence. In other words, your term insurance plan should ensure that your family does not face a decline in lifestyle, financial and social status.
However, for the term plan to meet this objective at any point in your life, it has to keep up with your financial growth.
Growing Lifestyle & Family
If you look at the key-life events in anyone’s life, the general path is bachelor, employment, marriage, children, higher-education, child’s marriage and retirement. Until retirement, your financial responsibilities will keep growing along with your income and lifestyle.
Not only that, but there are also other factors like general inflation, income growth and liabilities. Consider that you are already married and have children. So, all family milestones are complete, and your family will not grow any further.
If you assume a nominal inflation rate of 5% p.a. and your current household expenses are Rs. 50,000, this will double in the next 15 years. That is when the school fee and children’s expenses remain unchanged except for inflation.
Over a long period, your income is expected to grow resulting in lifestyle growth. You may also acquire properties and other large assets using loans, which adds to your many financial liabilities.
Since you need the term cover to fulfil the financial safety needs of your family, it has to grow along with your needs to stay relevant for a long time.
How to Ensure that your Term Insurance is enough for the Growing Needs?
You have only two options to ensure that your term insurance keeps up with your financial needs and life while keeping account on inflation.
1. Buy a new plan at every milestone that you reach in life
Buying a new term plan at every major life-event may sound feasible but has many drawbacks:
- As you age, your premium for each increment will be higher
- You will need to appear for a medical examination for each new term policy
- You will end up with multiple term plans, premium payment dates and policy features; i.e. tougher to manage
Other factor which may affect your new life cover needs is your health and lifestyle conditions. So, for you to ensure that your life cover keeps increasing with you, you will need to buy a new term plan every few years.
2. Buy a term plan with option for growth in sum assured
If you are buying your term insurance early enough, you should aim for a term plan which gives you the option to increase the sum assured. For example, if you are a bachelor and have started earning, or even buying term cover right after marriage.
Now the increment options can be of two types:
- Cover increases upon a life event
- The cover increases automatically every year
Canara HSBC Oriental Bank of Commerce Life Insurance iSelect Star term plan offers both these options. However, for an early buyer, you should look at the life-event based growth rather than automatic increment.
What is Life Event-Based Growing Term Insurance?
Life event-based growth allows you to increase your term insurance cover based on a specific life event. With the iSelect Star term plan, you can increase your term insurance cover for the following life events:
- Home purchase with a home loan
iSelect Star term plan allows you to increase your cover for these events such that your total sum assured after all events are double the amount you started with.
For example, if you buy a term cover of Rs. 1 crore when you are a bachelor, after marriage, you can increase your term cover by 50% of the original. Then at childbirth and home purchase (if you use a home loan), you can again increase the cover by 25% each. Thus, after the last life-event, you will have a term insurance cover of Rs. 2 crores.
Is there an Automatically Increasing Term Cover?
An automatic increment option where the cover amount will grow every year makes more sense if you are a parent and already have a house. In other words, the only thing your life insurance must keep up with is your income and lifestyle.
iSelect Star term plan has the feature to automatically increase the life cover which grows at a simple rate of 5% per annum. The cover keeps growing until it is double the base sum assured.
So, if you bought a term cover of Rs. 1 crore, the next year you will have a cover of Rs. 1.05 crores, the next year your life cover will be Rs. 1.1 crores and so on. So, the sum assured will keep growing until you have a life cover of Rs. 2 crores or a death claim is filed on the policy.
Buying a term cover that offers opportunities for increment without going through the process of buying a fresh has several benefits. It saves time and effort with faster processing & less paperwork, and offers discount on premiums for existing customers.
Auto-increment options make it much easier for you to maintain a life cover that matches your financial status and needs. Plus, you can live easy as increasing the cover will not mean going through the whole process of buying a fresh life cover.