How to Choose the Ideal Term Plan for Your Family Future?

2021-05-13

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An ideal term plan is said to be the cushion for a family, which helps them bounce back when they lose a primary breadwinner in the family. In a way, if you buy an adequate term insurance cover with all the necessary features and benefits, your family can continue living as they would if you were alive.

How do you claim that ideal life cover? Start with the following three steps, and it might just get easier to define your ideal life cover:

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What Should Term Insurance Cover Include?

Your term cover should include the following three things of your family:

Important financial goals
Financial liabilities and loans
Family’s important lifestyle expenses
Post-retirement corpus for the dependent spouse

So, before you can decide the life cover amount you need to have your goal plans in place. Consider for example the following goals of Vardan family, which has 2 children and an annual post-tax income of Rs. 75,00,000:

Goals & Needs	Present Cost (Rs.)
Child 1 (7 years) Higher Education Goal	40,00,000
Child 1 (7 years) Marriage Goal	30,00,000
Child 2 (2 years) Higher Education Goal	40,00,000
Child 2 (2 years) Marriage Goal	30,00,000
Present Home Loan Balance	1,30,00,000
Other Liabilities	50,00,000
Retirement Corpus for Spouse	2,50,00,000
Asset Transfer & Final Rights Expenses	15,00,000
Family Income Needs	4,00,00,000
Total Cover Required	₹9,85,00,000.00

Estimating the family income requires the present household expenses you think will continue even after you. For this example, we assumed that Vardans need at least 35% of their post-tax income to maintain their lifestyle and run the household.

Since this is a post-tax income and will certainly fall in the highest tax bracket, the family will need about 30% more than their monthly income.

Features that your ideal term plan should have:

The ideal term plan for your family would be the one which operates for the convenience of your family and not the opposite. So, it must offer support in the following manner and circumstances:

Offers financial assistance in case of a life risk or health risk which decreases your capacity to support your family financially
Offers the benefits in a manner which helps your family continue with their life with minimum stress
Operates seamlessly when it comes to managing the policy or settlement of claims

Covering All Risks:

The first part about the events in which the term plan should help you or your family are up to you can choose these benefits while buying the term plan. For example, adding a premium waiver and total disability benefit to your term insurance will help your family in case you are physically disabled due to an accident.

Canara HSBC Life Insurance iSelect Smart360 Term Plan covers you for life-threatening terminal illnesses and risk of untimely death under one single cover. So you’ll only need to add an accidental disability and waiver of premium covers to your policy.

Paying Benefits for Family’s Convenience

Running household and important life expenses is a regular thing. You need a minimum sum of money every month to meet these expenses and so does your family. However, traditionally, life insurance benefits would be paid in a lump sum to the family, and they were expected to meet all their life needs with it.

Apparently, endowing a family which has just lost the primary income with a huge sum of money, does exactly the opposite of improving their situation. Now they must decide how to use this money to:

Meet their regular expenses for several years, not to mention inflation
See that they can still achieve their life’s important goals like higher education and marriage
Also, pay off any debts the family has

Thus, simply giving a large sum of money is not the kind of solution you should consider ideal. The ideal would be that the insurer pays a monthly sum to the family for several years, and if possible adjusted for inflation.

This is the only solution which will keep them going for a long time without having to bother about compromising on their living standards or losing the income.

Canara HSBC Life Insurance iSelect Smart360 term plan allows you to define a part of the total sum assured for payment as regular income to the family. We will see how later in this article.

Seamless Operation & Claims Settlement

This is a very important aspect of any life insurance cover. You should always look for an insurer with an impeccable claim settlement and processing record. Also, purchasing the policy online helps in not only managing but also claim settlement with many insurers.

Similarly, the insurer offers a claim assistance program for the families filing the life insurance claim. A representative from the insurer’s office will coordinate and collaborate with the family to help them with documents and forms for faster claim settlement.

What Is the Ideal Term Cover for You?

Now that we know every aspect of our life that our term life insurance should cover; we can look at the ideal amount of term insurance cover. Your total life cover is divided into two parts:

A Lump sum part which will take care of liabilities, long-term goals etc.
A sum which will create a regular income stream for the family

The Lump Sum Part:

Deciding the lump sum part is easy. All you need to do is list all the important financial goals of your family and list the present cost of these goals. Add existing liabilities to this amount and you have the lump sum part of your life cover.

In our example of Vardan family above, their lump sum need as of today is Rs. 5.85 crores

The Income Part:

Estimating the Income part requires a different approach. First, you need to figure out how much income your family would need every month. In our example of Vardan family, we assumed that the three remaining family members would need at least 35% of the total post-tax income of Rs. 75 lakhs

Thus, arriving at a monthly post-tax amount of about Rs. 2.2 lakhs. Now, we can simply use the multiplying factor provided by the insurer to estimate the lump sum benefit we should choose to enable this income for the family. Also, let’s not forget, it has to be growing.

What if Family Has to Invest Lump Sum to Generate this Income?

In the case where you do not include the income part separately into the term plan, the family will need to invest the lump sum in an annuity plan. Monthly payments from annuity plans are taxable as salary income.

Thus, the amount has to be adjusted for taxes, provided the family income will fall in the highest tax bracket of 30%. The income pay-out from any other monthly income plan will need at least 30% higher lump sum amount.

The family will need to receive at least Rs. 4 crores from the term cover to earn such income.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.