Term insurance secures the financial well-being of the family if the policyholder meets an untimely demise. This makes term insurance the simplest form of insurance but it also underlines a crucial aspect of term insurance. For maximum applicability, term insurance is dependent on the family needs and hence is a customised product. The policyholder must regularly assess their needs for a term insurance and often, the most prominent need should be at the early stages of life. We expand on ‘Human life value’ which emphasises the risks that term insurance should protect and the age at when it is most applicable.
Human life value
Human life value (HLV) is the basic assumption in term insurance and is based on estimating policyholders’ earnings potential and matching it with the policy’s sum assured. Most insurance portals estimate HLV for an individual, but it is also important to understand the process so as to purchase the right cover. A person’s HLV is derived based on annual maintenance expense which is expected to grow at inflation rate. This amount is further adjusted with existing liabilities, home or business loans for instance. The HLV may be adjusted with existing assets and other insurance policies based on judgement. It is also important to note that an HLV is only a guide towards the minimum sum assured required.
All these variables undergo significant changes once in a few years, requiring a similar reassessment of term insurance. For instance, a critical point when policyholders re-consider term insurance is when the family grows, or home loans are added. A typical HLV may run into crores for any individual and term insurance is the apt vehicle to create such a cover.
Income and liability protection
As aforesaid, term insurance should target income and liability protection to ensure the lifestyle and asset protection of a family in any circumstance. This extends to retirement corpus for the individual and dependents.
These risks are highly exposed for an individual at a younger age which makes term insurance a crucial requirement at such time. For instance, consider a lumpsum corpus to take care of the family. At a younger age, the corpus would have hardly started owing to a smaller investment portfolio (if any) which has had a shorter period to compound and grow. But at an advanced age with the right portfolio and right returns, a substantial coverage would have been built. Term insurance coverage should act as the large corpus at a younger age when such corpus would be difficult to build.
At a higher age, one would have secured the financial requirements of dependents as well, which most likely would be unaccomplished at a younger age. The funds for child education for instance or a medical policy for aged dependents would most likely be fulfilled at an advanced age than at a younger age.
The same is true for outstanding liabilities as well. While home loans are taken for 20 years or so, it is not uncommon to fold up a housing loan within eight to ten years. This implies that risk from an outstanding loan is higher at a younger age than at other times.
These conditions of an insufficient lumpsum corpus, risk of dependents and risk of outstanding liabilities are higher at a younger age. The term insurance thus seems most applicable at such a juncture than at an age where there is sufficient funds to take care of the few remaining dependent risks along with zero or highly reduced liabilities.
Apart from these factors, term insurance at a younger age is also easier on premiums though the duration of payments is higher. Unlike health insurance which is renewed every year and may involve an increase in premium, term insurance premiums are fixed for the duration of the policy term and do not change. As the premium prices are dependent on age (lower the age lower the cost) amongst other factors, a term insurance at a younger age is low on premium cost and continues to remain so for the reminder of the period. Also, with critical illness rider, a term insurance can also double as a partial health insurance with a lumpsum 5-10 lakh payment on detection of any one of critical illnesses.
These factors imply that term insurance is suitable for a younger policyholder starting a family and should be sought after at such stages.
What’s HLV?
A person’s HLV is derived based on annual maintenance expense which is expected to grow at inflation rate
