The purpose of taking a term insurance plan is to ensure that the dependents may maintain the same standard of living even after the early demise of the earning member. So, the insurance should provide enough cover that would replace the earning and help the dependents lead a life without sacrificing necessities due to shortage of money.
It is very important for every earning person to take adequate insurance to ensure financial well being of the dependent members of the family in case of his/her unfortunate early demise, which may be ensured through term plans effectively.
While applying for a term insurance plan, the following factors should be kept in mind:
Unlike endowment insurance policies, premium in term plans increases with period of insurance as the risks increase with the duration of cover. But go for a tenure that would cover your entire working life and in the pursuit of saving money and paying lesser premiums, don’t end up buying term insurance for a short period. The motive of taking a term policy is for protection and it offers nothing if you outlive your policy’s maturity. So instead of benefits, you may incur losses by taking a short-term policy.
There are various ways to calculate the amount of insurance needed, like – income replacement method or human life value (HLV) for persons having regular income and expenditure replacement method for those having uneven income. The factors that influence the amount of insurance are the current income of the person, expected yearly rate of increase in income, length of remaining earning life and prevailing risk-free rate of return on investments to calculate HLV and expenditures (of his/her dependents), rate of inflation and risk-free rate of return on investments to calculate insurance needed to replace future expenditures.
Roughly, a term policy should be at least ten times as much as your current income. Although the required insurance cover may seem like a huge amount, but don’t buy a term plan with coverage that is too little to sustain your family’s needs during your earning life and thereafter.
Apart from the basic cover that triggers on demise of the policyholder, options of riders are also available to fetch benefits at times of disability or critical illness, which may prove very useful in such situations. So, you should consider availing such riders by paying some extra premium.
It is very important to study the terms and conditions to realise how stringent may be the claim settlement process. Also, don’t just study claim settlement ratio that predominantly reflects settlement of claims, which are admitted by the insurance company. You should also look at the claim payment history of companies to see if fine prints are blatantly used to refuse admitting claims, or cases are dealt with leniency, like some companies reduced the missing period of 7 years to settle claims of nominees of missing persons during the Uttarakhand floods and during similar natural calamities, or went on to settle claims on death of security personnel in terror attacks, while other companies denied claims showing the terrorism clause.
As the claim arises only after demise of the policyholder, it is very important for a policyholder to preserve the copy of filled up proposal form, benefit illustration given during demonstration of the policy and copies of pre-policy medical checkups in a safe way, which the nominee would readily access. In the absence of a policyholder, who entered into the contract with the insurance company, such documents may prove very handy for the nominee if some disputes arise during the claim settlement.