Getting term life insurance is an integral part of financial planning. Since no one can predict the financial commitments and responsibilities of the future, it is essential to have a policy that safeguards your interests. That is why a term insurance policy becomes mandatory for the security of your family in the unfortunate event of your death.
In this article, we will look at some common mistakes to avoid while getting term life insurance.
1. Inadequate Sum Assured
Term insurance policy tends to secure the family of the insured in the event of their untimely demise. It intends to comfort the family of the deceased financially after they pass away. However, if the insurance amount does not suffice for the insured’s family, it leaves them helpless, defeating the purpose of the policy. This happens to be a common mistake that policyholders commit at the time of getting a policy. An inadequate term insurance cover cannot meet the financial needs of the family and usually stems from miscalculated future insurance requirements. Such situations can arise if the sum assured is not estimated properly, without acknowledging dependent factors like inflation rate, liabilities, loans, children’s education, etc.
2. Expense Driven
More often than not, the primary determining factor while selecting a term plan for customers is the cost of the policy rather than its relevance and utility. Experts believe that the key factors which people should consider while getting a term insurance plan is the suitability of the plan to the buyer’s need, claim settlement ratio, the insurer’s financial standing, and their reputation. These factors are important as they impact the buyer’s purchase in the long run. Hence, going for a plan because it is available at a lesser price is not wise and has long-term implications.
3. Late Purchase
Getting a term plan implies getting protection toward the potentiality of death. Therefore, the greater the risk, the greater is the premium amount to cover such a risk. Hence, the more you delay the purchase, the closer you get to the risk of leaving your family at bay in the event of your demise. If you buy a term plan worth Rs 50 lakh at the age of 25, the premium amount will be as low as Rs 5000 for a year. However, if you get the same plan at 35 years of age, the premium amount becomes almost Rs 9000. Moreover, as you need to pay the premium annually, locking in at a higher price can prove to be an expensive mistake. Thus, late purchase of a term plan has implications that financially affect the policyholder and their family.
4. Incorrect Information
One of the most basic mistakes that people tend to make is hiding information or providing incorrect information. Details about your medical history, financial status, etc. is valuable information for your insurer which helps them assess your case. Mostly, people hide information about pre-existing diseases, lifestyle behaviours, etc. to lower the premium amount. However, failing to report such data while getting a policy is a bigger mistake than not getting a term plan. So, if a policyholder passes away due to a pre-existing disease that was not disclosed to the insurer at the time of purchase, the insurer is likely to reject the claim.
5. Purchasing to Save Tax
While it is true that life insurance policies are a great way to avail of tax-saving benefits, it should not be the sole purpose of getting life insurance. Section 80C of the Income Tax Act dictates that life insurance policies can offer saving benefits of up to Rs 1.5 lakh. Moreover, Section 10(10D) of the Income Tax Act says that any bonuses or policy proceeds received on maturity or in the event of death of the policyholder, are exempted from tax. Buying a term plan to save on income tax is a mistake, as it drives the buyer with one prime objective shadowing the true purpose of a term plan.
Being vigilant about making the above mistakes can help you save time and effort while getting a term life insurance policy. The idea is to ensure that getting a term plan actually benefits you and your family in the long run, instead of being a ceremonious formality. So carefully evaluate your priorities with the benefits of your chosen policy before making a purchase.
(By Sanjiv Bajaj, Jt. Chairman & MD, Bajaj Capital Ltd)