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 –
What should term insurance cover include?
Your term cover should include the following three things of your family:
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|
|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:
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 Oriental Bank of Commerce Life Insurance’s iSelect Star 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:
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 OBC Life’s i-Select Star 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 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:
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.
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