Should I Buy Another Term Plan After My Income Increases?

As your career progresses and your income increases, reevaluating your financial plans is crucial to ensure they align with your current and future needs. One critical component of your financial portfolio is life insurance, specifically term insurance. If you’re contemplating whether to buy another term plan after a rise in income, it’s important to consider several factors to make an informed decision.

Understanding Term Insurance

Term insurance provides coverage at a fixed rate of payments for a specified period, or “term”. If the insured person dies during the term, the death benefit is paid to the nominee. It’s essential financial protection for your family in case of your untimely demise, ensuring they remain financially secure.

Why Consider Buying an Additional Term Plan?

1. Increased Financial Responsibilities: As your income grows, so might your lifestyle and expenditures. You may have taken on more significant financial obligations like a home loan, car loan, or higher educational expenses for your children. An additional term plan can help ensure these debts are not a burden to your family in your absence.
2. Inflation: The value of money decreases over time due to inflation. What seemed like a substantial insurance cover five years ago might not suffice in the current economic climate. An additional term plan can compensate for this erosion in value, maintaining your family’s lifestyle without compromise.
3. Changes in Life Goals: With advancements in your career and personal life, your long-term goals might also evolve. Whether it’s planning for your child’s overseas education, a second home, or more extensive retirement savings, increased coverage can aid in achieving these dreams without financial strain.
4. Age and Health Considerations: Buying an additional term plan sooner rather than later is advisable since premiums increase with age and potential health issues. Securing a lower premium rate now for additional coverage can be more cost-effective than waiting until it becomes a necessity.

6 Practical Steps to Assessing Your Term Insurance Needs

When considering purchasing an additional term plan following an increase in income, it’s vital to undertake a structured assessment process. This ensures that any decision made is well informed and tailored to your specific financial circumstances. Here are key steps to guide you:

1. Review Current Insurance: Start by reviewing your existing term insurance plans. Analyze if the coverage is adequate considering your current debt, family’s lifestyle needs, and any future obligations you anticipate.
2. Financial Goals Audit: List your short-term and long-term financial goals that have emerged or changed due to your increased income. This might include new property purchases, plans for starting a business, higher education funds for children, or enhanced retirement savings.
3. Risk Assessment: Evaluate any new risks that might have arisen. For example, if your job now involves more travel or if you have taken up a new hobby that could be considered risky, your insurance needs might have changed.
4. Consult a Financial Advisor: While online tools and self-assessment are helpful, consulting with a financial advisor can provide deeper insights. They can offer a third-party view on your financial health and insurance needs based on your updated income and life goals.
5. Update Beneficiary Information: Ensure that all personal information and beneficiary details in your existing policy are up to date. Changes in your personal life, such as marriage, the birth of a child, or a divorce, can affect your insurance needs and decisions.
6. Consider Policy Riders: Evaluate if adding term insurance riders to your new or existing policy could provide more comprehensive coverage. Riders such as accidental death, disability, or critical illness can significantly enhance your insurance at a relatively low additional cost.

How to Decide the Additional Coverage Amount?

Deciding on how much additional coverage you need requires careful evaluation. Here’s a step-by-step approach:

1. Assess Current Coverage: Review your current term plan. Is the sum assured enough to cover all current and foreseeable debts, and provide for your family’s daily needs and future goals?
2. Calculate Future Financial Obligations: Factor in loans, children’s education costs, and significant future expenses. Ensure the additional cover accounts for all these aspects.
3. Consider Your Current Income: A common thumb rule is having life insurance cover that’s 10 to 15 times your annual income. If your income has significantly increased, your insurance coverage should reflect this.
4. Budget for Premiums: Ensure the premiums of the additional term plan are affordable and do not strain your finances. Use online calculators to estimate premiums based on the desired cover amount and term length.

Choosing the Right Term Plan

When selecting an additional term plan, consider the following:

1. Insurer’s Reputation: Check the insurer’s claim settlement ratio, which indicates the likelihood of your claim being honored.
2. Policy Terms: Look for flexibility in terms of policy tenure, premium payment options, and riders like critical illness or accidental death benefits.
3. Compare Plans: Use online comparison tools to compare different term plans based on features, benefits, exclusions, and premiums.

Conclusion

Adding another term plan after an increase in income is a proactive strategy to ensure your family’s financial security. It reflects responsible financial planning, considering life’s uncertainties. Regularly reviewing and updating your insurance coverage not only adapts to your changing lifestyle but also fortifies your family’s future against unforeseen circumstances.

In summary, an increase in income is a significant event that warrants a reevaluation of your term insurance needs. By aligning your insurance coverage with your current financial status and future goals, you safeguard your family’s financial interests comprehensively. Remember, peace of mind and financial security are invaluable assets that a well-thought-out term plan can provide.