Term Insurance is the Most Important Element when we talk about the Personal Finance of our Lives. It helps us in covering the Risk & Liabilities in a big way. 7 Key Factors we Should Consider before buying a Term Insurance Policy discussed here. One Should know how a Term policy is Different from a Traditional Insurance Policy?
If you are planning to buy a term policy in the coming future, then Reading this article may help in choosing a suitable one for you.
Most People Think “Which term plan should I buy?”, Firstly, we have to make sure that we have some basic understanding of insurance policies, as different life insurance policies offer different Cover benefits. There are add-ons benefits also offered by insurance companies over basic life insurance covers, to meet the customer needs.
Understanding a Policy helps us to decide which policy we should buy and what Kind of Riders we should choose. I am explaining a few Important Factors, knowing which we can always choose a Good and Suitable Term Policy matching Our needs.
1- Term Insurance Cover Required & Duration of the Policy
Term Insurance Cover requirements are usually calculated on two Methods; Income replacement Method & expenses Cover method. It is believed that our family should be provided a regular Payout to meet their expenses till the age of our Retirement while calculating the cover and a Payouts for the other Liabilities.
You can calculate the required insurance cover by Multiplying your current Yearly Income or Expenses * Years Left in Retirement (60- Current Age). You should also consider the Inflation factor, Increment in the Expenses or Income in Future years, and remaining Liabilities & assets we have.
Term Insurance cover should always be big (Minimum 1Cr.) Looking at the current era of expenses & Inflation. It is also advised to have the term policy cover till the age of 60 earlier but now some companies are offering the cover till the age of 75-85 Years of age.
There is no Limitation on the term policy cover one may take for his life but for the ethical practice, you are allowed to take only 10/20 times cover as per your Salary package or ITR available.
2- Maximum Cover for per rupee Premium:
The Core policy term is almost similar in all the Policies but premiums are different due to the Brand Value, additional benefits offered, etc. Since Term policy is going to be the long-term Commitment (30-50 years) so taking it from a Company that is offering maximum cover at a lower price is well advised.
In term-policy, you have to pay equal Premium for all the Years of Cover so it is advised to buy a policy as early as possible. A 25 year Person can get 1Cr. Cover in just Rs. 7K-10K annum where a 35 year Person has to spend 17K-25K per annum for the same Cover and for a 45-year-old person it may go up to 40K-50K per year for 1Cr. Cover. The earliest you buy a term policy the maximum value you get for your money.
3- Choose Limited Add-Ons or Term Insurance Riders
“Riders” or Add On Covers are great to add on with a term insurance plan, but only if you really require them as per you Need of them. Don’t add them just because it’s available and gives you a sense of more security. If you do a lot of travel and are most of the time in your case, the risk of dying in an accident is higher for you, so in that case, you can add an accidental rider.
- Accidental Death Rider
- Permanent & Partial Disability
- Critical Illness
- Waiver of Premium
- Income Benefit Rider
Similarly, if you feel that you want to cover the risk of some critical illness in the future and don’t want to buy a separate policy, then you can add critical cover. But if you are already having a good health Insurance Policy of almost the same cover then there is no need to pay the premium in two different policies for a similar cover.
It is also advisable to buy the basic version of the term insurance plan & save further money for planning the other aspect of Personal Finance.
4- Do Not Choose Term Policy based on “per day premium” marketing or Cheaper Online Policy.
Many insurance companies & third Party Insurance Aggregators have started to advertise term insurance plans by sharing the cost per day basis, for example – “Buy 1 crore term plan just for Rs 25/day”.
However, note that these numbers might be applicable only for a certain age group and tenure of the policy. This is just a Marketing Gimmick, each individual requirement are different from each other, Premiums are calculated based on Your current Age, Policy term, Habits (Smoking, Drinking), nature of the job, etc. It is just a marketing thing to show the standard premium per day basis.
Also, try to avoid buying a policy on third-party websites, instead of either buy the policy from the respective insurance company website, Directly from Office or any Insurance advisor. You are buying a Term Insurance policy for Death benefits so it should give you mental peace that you have completed all the formalities properly and you have one direct number to connect for any concern. Call Centers only do the sales Pitch and sometimes they miss the very Imp Info due to the pressure of Desperate sales.
5- Important Disclosures – Habits, Health Information & family History
One of the worst things people do while purchasing any life insurance plan is to hide the fact that you are a smoker or consume alcohol. Please don’t hide it. Your premium calculation happens based on this critical information and if you hide these facts, then you are actually breaching the contract with the company and almost always your claim will be rejected at the end. Also, don’t think that just because you smoke just once in a while does not make you a non-smoker.
Another mistake people do is to hide any critical health information while purchasing the policy. If you have any health issues or have gone through any major operations/surgeries, disclose in the Proposal Form to the Insurance company. One of the reasons for term insurance claim rejection is hiding important facts while purchasing the policy. Not only your Health Info but disclosing the Family history is also important.
An insurance policy is actually a proposal from your end in the eyes of law where you have to disclose all the facts and the company will accept your case or reject it. So the bonus of providing all the information is on you.
6- Claim Settlement Ratio
Claim Settlement Ration is something that shows an actual picture of the Company but not the exact fact about the term policies. It covers all kinds of policies settlement ratio so choosing a Term policy only on the basis of Claim Settlement Ratio is not advisable but this does play a vital role. Any ratio between 92-98% is considered as a good settlement ratio.
7- Only Death Benefits Available
In Pure Term policies, you do not get anything as maturity benefit but your Nominee gets the benefit upon the death. Some companies are offering maturity benefits also but that is not a good deal coz the premium will be much higher side. Always prefer to buy a core term policy with less premium and maximum Cover.
Term cover is paid in case of accidental deaths as well along with all other reasons for death (natural or accidental, or death due to some illness). If you have taken any riders (additional benefits, such as accidental death benefit, a permanent disability rider, and critical illness rider so you will be paid an additional amount along with the core cover.
Many of the buyers are ignorant about the fact that “Deaths due to Terrorist Attacks” are not covered under term insurance. Another thing, Natural calamities or acts of God like earthquake/tsunami aren’t covered either. As in such disasters, the casualty is high and the claim to be settled runs in hundreds of thousands of rupees which is impossible to settle by the company at once. Therefore, one must remember to clear these facts while buying term insurance.
For Term cover Calculation, you can always visit at the Insurance calculator section of https://mutualfundcalculators.com