The headlines that dominated the news this year are Corona Virus and Kobe Bryant’s tragic and unexpected death. When a young person passes away at the peak of their career in a sudden and unexpected manner, it sends shock waves through the world. If the world is so shaken by this, one can only imagine how much harder it is for the family to cope.
The most sensitive element in the personal finance ecosystem is life insurance. We don’t devote enough attention to a family’s life insurance needs. The consequences of not having this conversation and taking timely action are disastrous for survivors. At a time when the family is going through so much emotional turmoil, the last thing they want to worry about is how they will manage financially. Term insurance is the easiest way to prevent such a situation.
Every smart saver and a financially savvy person must purchase a term insurance policy immediately. Term insurance premiums are set to rise by 15% to 20% from April 1st 2020. This means by locking in now you would be able to save 4-5 years’ worth of premiums over a term of 20-25 years you could potentially. Acting now is in your best interests and your family’s!
In this post, we will talk about:
- How life insurance works
- Why premiums will increase from April 1st, 2020
- Why term insurance is important for you
- How you benefit from acting now
How does life insurance work?
Life insurance is a way to manage financial risks. It is a contract between you (insured) and the insurance company. In this arrangement, you pay the insurance company a premium at regular intervals for an agreed term. If something happens to you, the insurance company will settle your family. This ensures that your family remains financially secure even after your time. A sufficient settlement guarantees a comfortable lifestyle in the event of lower-income. More importantly, they can get back on their feet without worrying about money.
Why will insurance premiums rise from April 1st, 2020?
The insurance company can afford to make these settlements because it collects premiums from many people like you. By managing the premiums effectively and reinsuring themselves, the insurance companies can honor settlements and maintain their financial health. Insurance works on the premise of risk and probability. It assumes that not every family whom they collect premiums from will need a settlement. One key assumption is that roughly 25% of families would need to be compensated. Of late, actual trends have diverged from assumed rates. So, insurance companies are settling more claims than they expected to. Consequently, the cost of reinsurance (where the insurance company insures itself against too many claims) has gone up. The insurance company has two options – it can either absorb the higher cost or it can decide to pass it on to the customer. When it absorbs the higher cost, its profitability reduces. When it passes the higher cost onto customers, insurance premiums become more expensive.
Why is term insurance important?
For a working professional, term insurance is the best life insurance option. Premiums are much more affordable than any other life insurance policy. You can leave behind a few crores for your family instead of a few lakhs. That level of financial security is crucial. For a 30-year old non-smoking man, 2 Crores of term insurance will cost roughly Rs. 15,000. Surely, any family’s financial security is worth that much.
How will you benefit by acting now?
Sooner or later, every financially savvy person realizes the importance of term insurance. There is little doubt that the insurance companies will pass the increase on to customers. Acting now will pay off until the end of your policy. You stand to save 6 years of premiums (for a 25-year policy) if premiums increase by 20%. It will also give you much more financial flexibility when you pay less for insurance.
Making a smart insurance decision today will serve your family in the years to come and give you financial peace. Sleep better at night by buying the right insurance policy at the right time.