In the last chapter, we read about what Term Insurance is and why you should purchase Term Insurance.

Does everyone need Term Insurance? The answer to this question is No. Everyone does not need Term Insurance. There are specific situations where a person needs Term Insurance, and these specific situations depend on 2 conditions;

  1. Financial dependency
  2. Total assets a person owns

These 2 factors go hand in hand when you decide if you need Term Insurance cover or not.

Let’s see how these 2 factors work in synchronization.

Dependency and Total assets

What is dependency –In simple terms, if a person is dependent on you for anything, it is called dependency. In financial terms, if a person is dependent on you for his/her financial needs, it is called financial dependency.

Now the question is – If a person is financially dependent on you, do you need Term Insurance in that case?

The answers can be both Yes or No.

Yes, you need a Term Insurance if you do not have the required assets i.e., the dependent person would not be able to achieve his/her financial goals from your existing assets, if you are not around.

No, you do not need Term Insurance if you have the required assets i.e. the dependent person would be able to achieve his/her financial goals from your existing assets, if you are not around.

Let me clarify it with an example:

Ajay has a Term Insurance requirement of 3 Crores which include his children’s higher education goals and his retirement goals (without calculating his assets like FDs, mutual funds, property, gold, stocks, etc.). But he has existing assets of around 6 Crores. Does Ajay need Term Insurance? The answer is No as he has more assets than Term Insurance cover requirement.

In the above example, would Ajay require Term Insurance if he has existing assets of 1 Crore. Yes, the Term Insurance requirement would be 2 Crores. In this case, his family would not be able to achieve their financial goals with existing assets if he is not around.

I hope the basic concept would be clear by now. Let us see the different life stages of a person and requirement of Term Insurance considering that you do not have required assets.

Single with No Dependents

Normally, this stage is at the beginning of your career i.e., when you start earning after your graduation or post-graduation. Do you need Term Insurance when you are single, and your parents are independent? The answer is -No.

Single with Dependents

There is an absolute necessity to purchase term insurance coverage in following cases.

  1. When you are single and your parents are dependent on you.
  2. When you are a single parent and your children are dependent on you.
  3. Term insurance requirement will increase if you are a single parent and your parents are also dependent on you.

Married Couple (without children) – Single Income and Dual Income

How does Term Insurance requirement change when you are married? First, you need to check who requires Term Insurance – you or your spouse?

If you are married and if there is only one breadwinner in the family, the person who is earning needs Term Insurance cover i.e., the spouse who is working need Term Insurance.

It is a common misconception that double-income married couples do not require any Term Insurance cover. In fact, both spouses need Term Insurance. The reason is simply the loss of income if any unfortunate event happens to one of the spouses.

In addition, if there are loans and if there is a substantial difference in income of the spouses, the necessity of Term Insurance increases.

What if one spouse die and the other spouse does not want to work after the unfortunate event or is not able to work due to disability?

So, it is always better to have term insurance coverage for both spouses and the cover amount should be divided in the ratio of their annual income.

Married Couple with Dependent Parents

Most of people see it from a single point of view; they consider their spouse as dependent when they purchase Term Insurance cover. What if your spouse and your parents, both are dependent on you? The need for Term Insurance is very high in this case. The amount of Term Insurance cover also increases as you need to consider the expenses of your parents as well as your spouse, if you are not around.

In this case, even if you have the required assets to achieve all your goals (as a couple)but do not have the required assets to support your parents, the spouse whose parents are dependent needs to purchase Term Insurance.

I am not trying to say that the other spouse will not take care of your parents, (if you are not around) but why would you make your parents dependent on your spouse? It would not cost much to add an additional layer of security.

Married Couple with Children

There is an absolute necessity to purchase term insurance coverage in this case.

If one of the spouses is earning, the breadwinner of the family needs to purchase Term Insurance.

If both spouses are earning, both need to take Term Insurance cover. If either of the spouses is planning to take a break from work, to take care of children, the spouse who is planning to work needs to take the higher cover.

Retired

Do retired people need to take Term Insurance cover? A plain simple answer is No. But it is slightly more complicated than that.

Normally, it is assumed that by the time you retire, your financial responsibilities would be over. It is not the case in every situation. Some exceptions can be there when you need Term Insurance cover even if you are retired.

Let me give you an example –Grandparents having responsibilities for their grandchildren (if some unfortunate event happens to parents).

Any outstanding loan, though you thought that it would be over by the time you retire but there is still some outstanding amount left, which may make a dent in the retired life of your spouse if something happens to you.

The premium of Term Insurance also increases drastically with age and there is no surety that you will get Term Insurance at this age.

So, this chapter was all about who needs Term Insurance and who does not. In next chapter, we will discuss how much Term Insurance cover you need.

Points to remember:

  • You do not need Term Insurance if you have required assets i.e., the amount of assets which would be enough for your family to achieve their goals if you are not around.
  • In all other cases, yes, you need to have a Term Insurance cover.

Feel free to post your doubts  in the comments section, if you have any.