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Understanding Term Insurance Analysis
This analysis is made for pure life insurance and no return of premium
- I personally don't think return of premium is a good idea intuitively, I might as well invest the amount and get a higher return.
- Please select your age, total cover, expected inflation rate over the next ~40 years and till when you want the insurance cover to be active
Key Ideas:
- Money now is worth more than money later
- Sometimes insurance companies try to sell you something else based on wrong calculations
- For example, if you paid ₹25,000 premium per year for 30 years, it doesn't actually equal to ₹25,000 * 30 = ₹7,50,000
- If you account for inflation, it will be much lesser because the ₹25,000 "feels" much lesser when you grow older.
- Beware when insurance companies ask you to pay higher amounts early in the plan.
- Something like "Hey, instead of paying ₹25,000 per year for 30 years, totalling 7.5 Lakh, you can pay 6 lakh in the next five years and save a lot of money!"
- This is mathematically incorrect and a marketing gimmick.
- The insurance cover will decrease over time due to inflation. Now this means 1 Crore now will be worth a lot less in 30 years.
- Insurance is a personal thing although there is quite some math involved and you decide what you want to pay how you want to be covered.
- Scenario 1: You want your dependents to be covered for ~2 years of expenses based on your lifestyle
- Scenario 2: You want your dependents to be covered for 4 months of expenses based on your lifestyle.
- Based on these future possibilities, decide the total cover and the duration of the cover.
- The key idea of insurance is to make sure your dependents are taken care of in case something happens to you.
- It kinda doesn't make sense if you die at 80 when your kid is earning and not really dependent on you.
- by the time you're 80 or 70, the cover value will decrease a significant amount due to inflation.
- I personally belive the ideal time to end the cover is when you are 55 to 65 years old as your children would be more independent by then.
- Even if you did set the cover at 70 or 80 years, make sure you're getting enough cover considering the total premium paid and the cover value at that time.
- Consider the claim ratio, complaints received, solvency ratio and reputation when selecting the insurance company.
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