Don't Ask ‘When to buy?’, Ask ‘For Whom to buy’ Term Life Insurance?
“When is a good time to buy term insurance?” - This is one of the most common questions people ask us. Should you buy as soon as you get your first job to get the lowest possible premiums, (or) should you buy when you get married?
Before we even answer that question - let’s take a step back and ask ourselves what the point of buying term insurance is! And maybe, just maybe - it’ll turn out that we need to ask a different question altogether!
The main objective behind investing into a term insurance plan is to keep your dependents - financial dependents - secure, In case your death happens before you accumulate enough wealth for their comfortable living. The claim amount can then help them retain their lifestyle and fulfil all their future dreams.
So - in our opinion - the ‘when’ is basically - ‘As soon as you have financial dependents’. And, the better question to ask would be -
‘For whom should I buy a policy (or) Who are my financial dependents?’
Any person who depends on your income and earnings, for their expenses and lifestyle - in the short-term or the long-term is your financial-dependent. Here are some family members you should think about - while deciding who is a financial dependent for the sake of your term insurance.
- Spouse (if dependent on your income)
- Children (present and planned in the near future)
- Parents (especially if they're going to retire soon)
As a corollary - if your spouse/ parent/ child doesn't depend on your income for their lifestyle and expenses - you can say they're financially independent, and hence are not your dependent.
Let us take a look at some examples to understand who might or might not be a financial dependent.
Say Arnav’s family consists of 6 members. They live in their ancestral home.
#1. His wife: She works in the same company as him and earns as much as Arnav does. She also has a few properties that her parents have left for her - from which she gets additional income. She doesn’t and wouldn’t need to depend on his earnings for her spendings in the future as well. She has no joint loans with Arnav either.
So, his wife is not a financial dependent.
#2. His children: His children are 5 (daughter) and 8 (son) years old and Arnav takes the responsibility of paying for their education and other expenses. Since they’re just in school right now - Arnav will need to pay for their higher education. Arnav is also building a fund for their daughter’s wedding.
So, his children are financial dependents.
#3. His father: Arnav’s father has retired recently from private service. Apart from a few savings, he doesn’t have a regular income or pension.
So, his father is a financial dependent.
#4. His mother: His mother is a housewife and since her husband is retired, Arnav takes care of all her financial needs now.
So, his mother is a financial dependent.
We should remember to check for financial dependency in the long term. For example, a person’s parents might be still employed and earning well today. However, they might retire in the next few years, without a pension - and as a result, become financially dependent on their child.
Important Note: If you’ve taken a large joint loan with your spouse (even if they’re employed and independent) - you should still consider them a financial dependent. This is because they will bear the full burden of your loan, should something happen to you. In such a case, it would be helpful to have a term insurance plan that covers the loan amount, and protects your spouse from such a possible long-term burden.
What is the significance of understanding about financial dependents?
It is important to understand who your financial dependents are, and what kind of dependencies are there - so that you are able to plan your term insurance accordingly to fit their needs.
As a part of calculating the right amount of term insurance cover to buy, you begin with a list of your financial dependents and understanding these two things, about their short-term and long-term monetary needs.
- The Living Expenses Fund: The regular expenses they would have - like groceries, bills, rents, school fees etc., that your term insurance will have to pay for.
- The Big Dreams Fund: Their long term dreams and aspirations - like a good foreign education, a big fat destination wedding, yearly travel plans etc.- which will require financial investment.
Once you understand these needs, you'll be able to calculate the amount of money you'll need to leave behind, so your financial dependents do not compromise their lifestyle or aspirations in case of your death.
So - have you given this question enough thought before buying a term insurance policy?
Got a question?
If you have a question to further understand who you should and should not count as financial dependents, you can post a question on our forum, and get answers from insurance experts within 6-8 hours.
- A Financial dependent is anyone who depends on your income for their financial needs in the short-term or in the long-term.
- You must understand who is a financial dependent and who is not - to be able to accurately calculate the required term insurance cover amount.
- Financial dependents essentially depend on you for their Living expenses (short term) and their Big life goals and dreams (long term). Ensure you consider both these situations while calculating the cover amount.
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