Many people buy a term insurance policy without estimating the actual requirement of life cover. Buying a term insurance plan for inadequate coverage may not serve the purpose for which it is purchased
If you are young and unmarried, buying term insurance may not be on your to-do list. Think again!
Now that you have decided to buy a term insurance plan, most of your worries may soon be off your chest. A term insurance plan, after all, provides life protection and ensures that the standard of living of one’s family is not compromised in the event of death of the breadwinner. Also, after buying a term insurance plan, life goals such as child’s education, home buying do not get de-railed. The good thing about a term insurance plan is that it is the purest form of insurance. In simple words, the premium that you pay goes entirely towards providing you a life cover.
However, there is a possibility that certain mistakes being committed when buying a term insurance plan, which may impact the optimum utilization of the plan.
Here are some crucial mistakes to avoid in order to get the best out of a term insurance policy:
1. Not comparing premiums In a term insurance plan, the cover amount to premium ratio is very high. This is because by paying a small premium amount, you can get a high sum assured. There will still be a big difference between the premiums of different insurance companies. Therefore, it is better to compare term insurance premiums across a few insurers before finalizing the plan. On the other hand, the lowest premium plan may not be the best choice unless it offers a more comprehensive coverage.
2. Getting a low life cover amount Many people buy a term insurance policy without estimating the actual requirement of life cover. Buying a term insurance plan for inadequate coverage may not serve the purpose for which it is purchased. Ideally, keep coverage of between 15 to 20 times your annual income. Depending on your age, financial liabilities and family circumstances, you may need a higher amounts. It is, therefore, recommended to properly calculate the amount of life cover required before buying a plan.
3. Buying for lower tenure The purpose of life insurance is to ensure the protection of life goals. Irrespective of your current age, buy a term insurance plan at least till age of 60. Life goals such as children’s education, home buying etc are usually met by then. However, for late starters or those who may still have financial liabilities after age 60, they may have to consider a term insurance plan even for a longer tenure. Once the liabilities are met, you may stop paying the premium as there is no maturity value in them. Nowadays, you have covers till the age of 85 years and above too.
4. Buying late If you are young and unmarried, buying term insurance may not be on your to-do list. Think again! Your parents may be financially dependant on you or you may be getting married in a few years from now. The premium that you will pay at a young age will be far less than what you will pay at a higher age. Once purchased at a young age, you will keep paying the same premium every year for 25-30 years.
5. Not accepting the ‘loading’ by insurer The premium in a term insurance plan depends on your age, the sum assured and tenure. This holds true for most buyers unless there is an adverse medical condition. Insurers make some buyers undergo medical tests, check their body-mass index and even ask for family medical history. In the case of existing medical conditions or un-healthy lifestyle, insurers ask for extra premium by ‘loading’ the base premium. It is a crucial underwriting process and one should consider opting for loading as it is important to get insured rather than not being insured at all.
6. Not adding riders Besides the risk of untimely death due to natural causes, there are risks on other fronts as well. A disability may leave one with a reduced earning capacity while a medical emergency may also impact one’s savings. A term insurance plan provides a means to add optional benefits called Riders such as accidental rider, disability rider, critical illness rider etc. Adding such riders to your base term insurance policy enhances the benefits and provides all-round protection.
7. Not exploring variations The death benefit in a plain vanilla term insurance plan remains the same during the policy term. However, there are a few other plans which come with an increasing cover or decreasing coverage. In some plans, there is an option for the family to receive a portion of the sum assured as a lump sum and the balance in regular instalments. You even have pay till age of 60 option while continuing the cover for a longer duration.
8. Not filling form on your own Generally, the buyer leaves the application form to be filled up by the insurance intermediary. This is one big mistake that most buyers commit. Going through the application form, one gets to know the information that insurers are seeking. It also gives you full control of the disclosures being made in the form. It is your life that is being insured and hence a sense of ownership will come once you fill the form by yourself. This is very important.
9. Not disclosing material information There are several important information that the insurer will want you to disclose in the application form. Such disclosures will relate to income and medical conditions including that of your family. It is important that you disclose them completely while applying. Any non-disclosures may result in repudiation of the claim, at the hands of the nominees, which will not serve the purpose for which you had purchased the term insurance plan.
10. Not informing your nominees If you want to ensure that the benefit of the term insurance goes to your wife and children, you can endorse the policy under the Married Women’s Property Act as well. Also, having bought a term insurance policy for the benefit of your family members, you need to ensure that they are aware of the purchase and have a copy of the policy document and the premium payment receipts.