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This is one of the two insurance policies that you must buy before even starting your investments. We are talking about the plain vanilla term cover here; medical insurance is the other must have. The term cover is a pure insurance policy, a risk protector of sorts. Specifically, a term cover is taken so that your family does not suffer financially in case you were to die suddenly. So, it is an irrecoverable cost for you and should not be looked at as an investment.

Before opting for a term insurance policy, you must take into account several factors so that you get a cover that suits your requirements. These include decisions on the quantum of cover, premium rates, mode of purchase, riders and medical tests.

How much is enough?

Crude as it may sound, you need to put a price or a value to your life. Why so?

Simply because the sum received on your (untimely) death should be enough to meet your financial commitments such as home loans, children’s education and their marriage. The idea is to let your family members maintain the lifestyle that they currently do.

Therefore, the amount for which you need to take a term cover has to factor in all expenses.

So, add all your EMIs, monthly utility bills, grocery expenses, kids’ school fees and all other costs. Multiply this figure by the number of years left for your retirement. It is assumed that you would have repaid your loan before retiring.

Let’s say you are 35 now. If your monthly expenses, including EMIs, add up to ₹75000 and you have a 25-year home loan and 25 years to go for retirement, you must multiply ₹75,000 with 300 months (25 years). Thus, you need to take a term cover for ₹2.25 crore.

Another way to calculate the sum assured is to just add up all expenses and multiply it by the time to go for your retirement. You can then add the loan amounts outstanding to the earlier amount and arrive at a suitable sum assured.

To take a more conservative call on the amount of insurance required, you can even add your monthly investments (SIPs in MFs, RDs etc.).

It is also a good idea to factor in inflation and any increase in your standard of living. If you and your spouse work, both need to take term covers separately.

Insurance companies also have calculators to compute the human life value or the sum assured that your family would need in your absence. Usually, insurance agents and some online calculators just give a multiple of 10 or 12 times your annual salary. Often, the amount arrived at in such cases would fall well short of your requirements.

Therefore, choose detailed calculators (ones that ask you all your personal information), do your own math with the costs as given in the example earlier and take a final call. You will need to develop a statement of your assets and liabilities to make an informed decision.

If you have liquid or easy-to-tap investments of ₹25 lakh, you can reduce that from the total amount for which you need to take a cover — ₹2 crore in our example. But this approach is a tad aggressive.

The timelines

For how long should you keep paying premiums for your term policy? Ideally, till you decide to retire. That is, your intended retirement age minus your present age should be the policy tenure.

Of course, the implicit assumption is that you would have completed all your financial commitments and settled your children by the time you retire.

If you are not sure of that, buy a policy for as long a term as possible. The premiums will get steeper as you grow old! There are term covers available till the age of 75.

You can also take a second policy to enhance your cover, if your assets and liabilities swell, and as your salary soars midway through your career.

Make complete disclosures

While applying for a term insurance policy, come clean on all your habits and health ailments. If you are a smoker and consume alcohol regularly, state it upfront. If you have any existing health issues, disclose all details. In any case, most insurers, even those offering it online, insist on medical tests before giving out policies. By giving full details, the risk of claims getting rejected is mitigated. At the most, it will mean paying a bit more as premiums if there is a medical condition you suffer from.

Ignore the riders

Along with the basic term policy, you may be offered riders such as for accident, disability and critical illness.

If you opt for any of these, each of them can escalate your premium rates by 10-15 per cent.

If needed, take only the accident rider, as for a slightly higher premium, your normal sum assured would be topped with an accident sum assured, which could be to the tune of your basic sum.

Avoid other illness riders and opt for them with your health insurance policy instead, if necessary.

The costs

Most insurers offer plain-vanilla term covers online. It would be preferable to use this mode for buying the insurance policy.

For a 35-year-old male and a 25-year policy term, the annual premium for a ₹1 crore cover ranges from ₹12,000 to ₹20,000 across insurance companies. These rates are for purchases made in the conventional way through agents.

Companies such as HDFC Life, ICICI Prudential, Max Life, Bajaj Allianz and Bharti AXA are prominent players offering term cover online.

Don’t forget to avail yourself of the tax benefits under Section 80C for your term cover premiums.

Follow all these steps and get the right cover to shield you from life’s googlies!

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