Wealth building is a long journey that ends usually when you have either met your life's goals or earned enough to be able to meet them in future. However, given life's uncertainties, if something bad happens to the earning member midway through this journey, should the family members be left to their fate?
A well-planned wealth building journey plugs this gap through term insurance - a pure life insurance product that pays the cover amount to the nominated family member if the insured person dies. "The aim of creating wealth is to achieve some goals. A term plan protects that goal," says Aalok Bhan, Director & Chief Marketing Officer, Max Life Insurance.
Here is how you can use a term plan to ensure the well-being of your family when you are not around.
Protect Your Dreams: "When starting on the wealth creation journey, one of the first things an investor should think about is buying adequate insurance. Insurance is a great tool to protect oneself and one's family from unforeseen costs and, therefore, preserve wealth" says Rishad Manekia, Founder and Managing Director, Kairos Capital Private Ltd., a Mumbai-based financial planning firm.
You should not get complacent even when both spouses are working as dual income means higher goals and lifestyle expenses which a single person will find it difficult to sustain in absence of the spouse.
Least Costly: A term plan gives you higher life cover at a low cost. "A term plan is an affordable financial tool that allows individuals to financially secure the future of loved ones in their absence, adding a layer of security to navigate an unfortunate crisis," says Bhan of Max Life Insurance.
It scores above all other life insurance-cum-investment products. "It is much cheaper and gives a higher cover compared with other life insurance products such as Ulips and, therefore, can give investors the most value for money," says Manekia of Kairos Capital. A 30-year-old can get a Rs 1 crore cover at annual premium of around Rs 10,000. This means you spend just Rs 1.5 lakh in 15 years, almost 1.5 per cent of the protection amount.
Enhances Risk Appetite: The more sure you are about the well-being of your family, the more risk you can take while investing. This means you can go heavy on equities, which are known to be volatile in the short term but offer higher returns in the long run.
"The journey towards investing and wealth creation starts by evaluating current financial requirements, future goals and milestones and then building a sound financial portfolio matching your risk appetite," says Bhan of Max Life Insurance.
Ideal Cover: The ideal amount should consider all life goals related to each family member besides sufficient retirement income for your spouse. It should also help your dependents pay all liabilities. Ask an expert to quantify the current and future value of all your goals.
Most life insurance companies have an online calculator for this. "We at Max Life offer customers an easy to use 'Real Value Tool' that enables them to calculate their real value, that is, apt life insurance cover, taking into consideration current and potential financial responsibilities as well as the value of aspirations of your loved ones," says Bhan.
However, if you want the easiest way to reach closer to the adequate cover amount, follow a thumb rule. "The ideal cover should take care of expenses of surviving family members. That is why the rule of thumb is to look at 10 times the annual income. The logic is that this money will give the surviving members adequate time to get back on their feet and start earning on their own. Investors can also look at higher covers depending on their personal situation," says Manekia of Kairos Capital. However, if you have other significant obligations such as home loan, you can add that to your cover amount.
As income rises with time, keep increasing the cover amount to match the current obligations and lifestyle. "One should increase the life cover to match the increased value of life and insulate the family from unfortunate circumstances," says Bhan.
Additional Protection: There are other unfortunate events that may be as damaging as death. What happens if a person gets critically ill for a long period, losing his income and ability to pay the premium? What if one survives an accident but is permanently disabled? You can get additional protection against such threats in the form of riders selected at the time of buying the term plan.
"It is advisable to purchase critical illness riders. Policy holders are assured of a lumpsum upon being diagnosed with critical illnesses specified in the policy, giving protection over and above the base sum assured during tough times," says Bhan of Max Life. Though you can buy standalone critical illness plans too, they cost less if bundled with a term plan.