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Things to Know Before Buying Term Insurance in India
When it comes to financial planning, buying a term insurance plan is one of the most critical steps to ensure the financial security of your loved ones in your absence. However, choosing the right plan can be tricky. Making mistakes while selecting term insurance can lead to inadequate coverage, unnecessary expenses, or missed opportunities to secure your family's future.
In this article, we have covered everything you need to know about buying a term insurance plan. We will highlight the key considerations and common mistakes you must avoid to make an informed decision.
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Digit Glow Term Life Insurance
Know Your Budget for Buying Term Insurance with Illustration
Nagesh was a software professional who earned a monthly income of ₹80,000 after taxes. He carefully planned his finances to ensure a comfortable life for his family. Each month, he allocated his income to various expenses and investments.
Monthly Expenses of Nagesh:
After covering all these expenses, Nagesh was left with ₹10,000. While this amount provided a cushion, Nagesh was concerned about the future. He wanted to ensure his family's financial security for unforeseen events.
Nagesh decided to buy a term insurance plan, which would provide significant life coverage in the unfortunate event that the sum assured would support his family financially. With only ₹10,000 left after expenses, investing in term insurance within his budget was worth it to ensure his family's future was secure.
Table of Contents
13 Things to Consider Before Buying a Term Insurance Plan
1. Selecting Inadequate Coverage Amount
Choosing the right sum assured is crucial if you need term insurance for your family's financial security. This ensures your family has enough coverage if something happens to you. There are two ways to calculate the sum your family needs:
i. Manual Calculation
- Living Expenses Fund: Basic needs like groceries and monthly bills.
- Major Expenses Fund: Big costs like children's education and weddings.
- Major Liabilities Fund: Loans and other debts.
- Existing Funds: Savings and fixed deposits, adjusted for risk.
To make sure the sum assured is enough for the future, account for inflation by multiplying the calculated amount by 2.5 to 3 times. Subtract any existing life insurance coverage from this amount to find the shortfall and get term insurance.
ii. Using the HLV Calculator
Answer a few basic questions related to your life. The Human Life Value Calculator will quickly determine the right cover amount for your family.
2. Understand Your Payment Commitment
Remember, you must pay the policy premiums for a long time. If you miss even one payment, your policy will lapse, and you will lose all its benefits. So, before buying a term plan, be prepared for this long-term commitment.3. Choosing The Right Policy Duration
Consider your current income, savings, and future expenses when deciding on the duration of the term insurance policy. Estimate the age by which you will have met all your financial obligations and saved enough for the rest of your life. This is usually the age you plan to retire. You should aim to have term insurance coverage until this age, with an extra buffer of about 5 years.4. Premium Payment Term
Usually, you need to pay premiums until the end of your policy duration. You can pay your premiums yearly, half-yearly, quarterly, or monthly at your convenience. You can choose the limited pay option to finish paying sooner. This allows you to complete your premium payments in a shorter time.
There are various limited pay options, such as 5 pay, 10 pay, 15 pay, etc. For example, with the 5 pay option, you finish paying in 5 years. With the 10 pay option, you finish in 10 years, and so on. After completing the payments, you still enjoy coverage for the rest of the policy.
5. Increasing Cover
As you get older, your financial responsibilities will grow. You will get married, have kids, buy a house, and pay for your children's education. You may need to increase your term insurance cover over time to keep up with these responsibilities and ensure your family is always well-covered.
With the increasing cover feature, your term insurance sum assured will gradually increase at specific intervals until it reaches a maximum limit. This ensures your family is always adequately covered.
6. Protecting Your Family with the MWP Act
If you have loans and pass away before repaying them, the term insurance claim amount will first be used to settle those loans. Only after all debts are cleared will your nominee receive the remaining amount. Family members might also claim a share based on succession laws, which can be inconvenient.
However, if you are a married man, you can buy your term plan under the Married Women's Property Act (MWP Act) by signing an extra addendum. This act ensures that the claim amount goes directly to your wife and kids before anyone else. They can then decide how to use the money and prioritise their needs.
7. Claim Payout Customisation
If you pass away while the policy is active, the insurer will pay the claim amount to your family. You can choose how your family receives this amount based on their financial needs. Here are some common payout options:
Lump-sum Payout Option:
- Your family receives the entire claim amount at once.
- It is ideal if you have unsettled loans or liabilities.
Monthly Income Payout Option:
- The insurer pays the claim amount in monthly instalments for a specific period.
- It is best if you want to cover your family's day-to-day expenses.
Lump-sum with Monthly Income Payout Option:
- A combination of the above two options.
- Part of the claim is paid as a lump sum; the rest is paid in monthly instalments over a certain period.
8. Free Look Period
The free look period allows you to review the policy you just bought. It lasts 30 days, during which time you can check the policy document, terms and conditions, inclusions, exclusions, features, benefits, and limitations.
If you are unsatisfied or find something unsuitable, you can return the policy to the insurer without penalty or cancellation fee. Before choosing a term insurance policy, check the length and terms of the free look period to avoid any issues if you decide to return the policy.
9. Grace Period and Revival Period
These periods come into play if you miss your premium payment due date.
- Grace Period: This is extra time insurers give to catch up on your premiums. If you don't pay within this period, your policy will lapse, and all benefits will stop.
- Revival Period: This is the time when you can reinstate your expired policy.
The terms and conditions for both periods vary between insurers, so read and understand them before purchasing your policy.
10. Adding Riders
Riders are add-ons you can buy with your base term plan to enhance your coverage. They provide extra payouts for specific events. For example, if you get the waiver of premium due to an accidental disability rider, your future premiums will be waived if you become permanently disabled from an accident.
Common riders include
- Critical Illness Rider
- Accidental Death Benefit Rider
- Accidental Disability Rider
- Waiver of Premium due to Critical Illness Rider
- Waiver of Premium due to Accidental Disability Rider
11. Nominee of the Policy
You need to choose a nominee (or nominees) who will receive the claim amount if you pass away while the policy is active. This can be any family member, such as your spouse, children, parents, or siblings.12. Proper Research and Comparison
Before buying term insurance, conduct thorough research and comparison. Look at different policies and insurers' features, benefits, drawbacks, and customer service. This will help you make an informed decision.13. Seek Help from a Financial Advisor
Term insurance is crucial for your family's financial protection. To ensure you make the right choice, consult a credible financial advisor. They can guide you in selecting the right policy and features and help your family receive the claim smoothly if needed.Important Questions to Ask When Buying Term Insurance
How much coverage do I need?
You should aim for coverage at least ten times your annual salary. For example, if you earn ₹14 lakhs per year, consider a policy with a minimum sum insured of ₹1 crore term plan. You might need 15 to 20 times your annual income if you have significant financial obligations.What tenure should I pick?
Choose a tenure that covers you until you plan to retire. This ensures the payout can replace your income and support your family. After retirement, avoid paying premiums.Can my premium change in the future?
Typically, your premium stays the same throughout the policy term. Buying when you are young and healthy for better rates is beneficial. However, some policies might increase premiums if you develop risky habits.Will smoking affect my ability to buy a plan?
Yes, smokers usually pay higher premiums. You must disclose your smoking history when buying the policy. If you start smoking after purchasing the plan, inform your insurer, as they may adjust your premium.Do term policies cover accidental deaths?
Yes, term plans cover accidental deaths along with natural and illness-related deaths. You can also add an accidental death rider for extra benefits.Will the policy cover me if I move abroad?
Yes, but you need to inform your insurer about your move. They will decide if your new country of residence is safe enough to continue coverage.What happens if I outlive the policy?
The policy ends when the term ends, usually without maturity benefits. Some plans offer a return of premiums if you choose that option. You can also convert your policy to a lifelong plan, which will cost more.What if I miss a premium payment?
Missing a payment can be problematic, but insurers usually offer a grace period to make the payment without losing coverage. The length of the grace period depends on your payment frequency (monthly, quarterly, etc.).Common Mistakes to Avoid While Buying Term Insurance
1. Underestimating Coverage Needs
Many people opt for a lower sum assured to save on premiums, which can leave their family financially vulnerable. Always choose coverage based on your financial needs and future goals.2. Overlooking the Policy Term
Choosing a term that’s too short might leave you without coverage when you need it the most. Conversely, an unnecessarily long term can lead to higher premiums.3. Choosing Based on Price Alone
While affordability is important, the cheapest plan may only sometimes offer the best coverage or claim settlement process. Balance cost with benefits and reliability.4. Ignoring Inflation
It is important to account for inflation to maintain the value of the sum assured over time. To combat this issue, opt for an increasing sum assured.5. Not Comparing Plans
Buying the first plan you see without comparing it with other options can result in missed benefits or higher costs. Check the product features, the premium for certain coverage, riders available, returns guaranteed or non-guaranteed, the worth of the insurer, claim settlement ratio, etc.
Select an insurer with a credible market image, hassle-free processes and simplified terms and conditions. This ensures the claim process is easy in your absence, and your family doesn’t have to run from pillar to post.
6. Skipping Riders Without Analysis
Many people avoid riders to save on premiums, only to regret it later when they face situations that these riders could have covered.7. Hiding Critical Information
Providing accurate or complete information about your health, lifestyle, or habits can lead to claim rejection, defeating the purpose of term insurance. When your nominee raises a claim for the insurance amount, the insurance company will conduct a stringent check before approving.
If they find out that you had neglected to mention crucial medical information while buying the insurance policy, they might reject the claim. This can cripple your family financially in case of your unfortunate demise.
8. Delaying the Purchase
The price of policies keeps compounding with an increase in your age. This is so because, with increasing age, you become more susceptible to diseases, raising the chances of your natural death. Also, if you delay the purchase and meet with an unforeseen situation beforehand, your family will have no financial coverage.9. Ignoring the Claim Settlement Ratio
Claim settlement ratio refers to the number of claims the insurance company has settled against the ones raised without complications or delays. Focusing solely on premium costs without checking the insurer's claim settlement ratio can lead to issues during claim processing.
A high claim settlement ratio implies a better chance of your claim getting settled. Hence, choose a company with a higher claim settlement ratio.
10. Neglecting to Update the Policy
Life events like marriage, the birth of a child, or a change in financial responsibilities require updating your term insurance. Neglecting this can leave your family underinsured.11. Choose a Suitable Payout Option
Some insurance providers allow you to customise your insurance payout. For instance, you can choose a periodic inflow of money instead of a bulk amount in one go. This can help keep an eye on expenses.
On the contrary, if you have enough faith in the money management skills of your family members, you can go for a bulk payout option. So, decide carefully which one to opt for to ensure wise usage of the money.
12. Fill Your Application Form by Yourself
Plenty of things could be improved if anyone else fills out the application form for you. Also, you might not want to share your details with a third party. So, you must always complete the application form independently and with utmost care. You can contact the insurance company or your financial advisor if you cannot understand anything.13. Do Not Shift in Between the Plans
You can terminate a policy and purchase a new one if the previous one is not beneficial enough. However, if anything happens in the middle of this process, you will be left financially unsecured. So, make sure that before discontinuing the previous one, you purchase a new one to receive continuous protection.How to Choose the Best Term Insurance Plan for Your Needs?
Choosing the best term insurance plan involves several key considerations to meet your needs. Here are some important steps to guide you:
Buying a term insurance plan is a critical decision requiring careful consideration and planning. By considering your financial responsibilities, future goals, and the factors mentioned above, you can choose a plan that offers comprehensive coverage at an affordable price.
Avoid common mistakes like underestimating coverage needs, hiding information, or ignoring the policy details. Take the time to compare plans, understand the benefits, and select an insurer with a good claim settlement ratio.
Remember, term insurance is not just a financial product; it promises your loved one's security and peace of mind. Choose wisely to ensure their future remains secure, no matter what life throws your way.
Frequently Asked Questions
Do personal habits matter while choosing a term plan?
Should you consider credit repayment while deciding the amount?
Is the solvency ratio of the insurer important in selecting an insurance provider?
Can you buy more than one term insurance policy?
How do I decide the right coverage amount for my term insurance plan?
What is the ideal policy term for term insurance?
Should I consider the claim settlement ratio while choosing a term plan?
What are riders, and should I opt for them?
Is it better to choose regular pay or limited pay for premiums?
How does inflation impact the sum assured?
What happens if I miss disclosing critical information during the application process?
Why is comparing term insurance plans important?
Are there any exclusions in a term insurance plan?
Can I increase the coverage amount later?
How do I ensure my family knows how to file a claim?
Why is it essential to read the policy document of term insurance?
Can health emergencies be covered under term insurance?
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