Term Insurance: All You Need to Know

Term Insurance is not just an expense, it is a protection cover. Only 3.7 percent of the people in India have insurance, which means a large part of the population is without insurance cover. Not buying insurance is an injustice to loved ones. Particularly in times like Corona, term insurance will be able to help your family financially. So don’t miss out on the right term insurance, not just for yourself but for your family. Now, the central question is how to choose term insurance and why is it so important?

                                                                                                                                    Subas Tiwari

Term insurance is a basic life insurance policy, which gives you a cover of protection. Many times people postpone term plans because they consider it an expense, but its premium is not expensive. It starts with just Rs. 400 and you get a good life cover. In case of sudden death of the insured, the family gets the entire sum assured.

How to Decide on Term Insurance Cover?

Understand your income base and decide on the insurance cover based on that. Experts believe that there should be life insurance of 15-20 times the income. The cover can also be decided according to age. If you are below 30 years of age, then take a cover of 25-30 times of the income. If you are between 30-45 years, then take an insurance of 15-20 times of the income and if above 45 years, then 10 times the amount of income should be insured. It is also important to estimate how many people are dependent on your income.

It is wise to buy term insurance early. At an early age, you will be able to lock in the insurance at a cheaper premium. Younger people have lower premiums. The premium once paid, will always be fixed. Therefore, the sooner you buy term insurance, the more benefits you will be in.

Buying Term Insurance Online is better

  • If you buy term insurance online, you do not have to pay commission to any intermediary.
  • Buying online reduces the cost of premium for you and makes insurance cheaper.
  • If you buy online, you fill all the details yourself, so there is less scope for mistake.
  • Online settlement can also be done at the time of claim. You can apply for this online only.
  • Online claim is also settled quickly.
  • You have to submit some documents such as death certificate, KYC and bank account details.
  • The claim money gets directly credited to your bank account.

Benefits of Term Insurance Plan

  • Term insurance is the cheapest form of insurance.
  • It’s simple to understand.
  • Select the length of the term for which you would like coverage, say up to 35 years. So, payments are fixed and do not increase during your term period.
  • During the early years of a term policy, the premium will usually be significantly lower than for cash value life insurance.
  • In case of an untimely death, dependents will receive the benefit amount specified in the insurance agreement directly on filing the claim with supporting documents.
  • You can customize term life insurance with the addition of riders, such as Child Benefit or Accidental death.
  • Another popular feature of term insurance is the return of the premium. They may give the benefit of returning 100% of whatever you have paid.  

Limitations of Term Insurance Plan

  • There is a downside in that, if the insured person happens to outlive the tenure of the policy, all the amount paid in the form of premiums will be forfeited by the insurance company without any benefits to the insured or  to his/her family. Essentially all the premium will go down the drain, except for tax benefits he/she would have availed on the amount paid as term insurance premium.
    • There is one major hurdle that prevents people from purchasing a term insurance plan; it tends to create a mental block as it deals with the death of the person taking a policy. But it is morbid, as the rationale behind buying car insurance is exactly the same as buying a term insurance plan. 
      If a person meets with an unfortunate car accident while driving, he/she has to pay damage charges to the other party or the insurance provider will compensate him/her. On the other hand if the person is a relatively safe driver and avoids any accident, the premium acts more like a hedge (cover) against any event which might/might not occur.
  • Consumers resort to consulting their agent as they either do not have the time to go through the brochure of this product or they believe that the agent is in the trade & hence should know more of the product- so it is easy to ask him questions & get answers from him without counter-verifying with the insurer. Unless one is aware of the features of the insurance plan himself/herself, do not expect the agent to explain the plan in detail (some of the agents do not give proper advice to their clients and run behind commissions).
    • Term insurance provides coverage only for a limited period of time.
    • Premium rates are guaranteed only until the end of the term. Depending on the policy, premiums may be level for a period of 1, 5, 10, 15, 20, 25, or 30 years and then cease without any renewal option, or offer a fresh cover at the end of the plan period at a higher premium rate.
  • Deteriorating health can trap you in a policy with rapidly increasing premiums.
  • No insurance company offers term plan insurance over 75 years of age, which means it is not very beneficial to the insured after attaining 75 years.

Things to Keep in Mind while Buying a Term Insurance Plan

1) Claim Settlement Ratio

This gives us an idea about the claim solving ability of the insurance company. If claims are intimated and the insurance company settles those, claim settlement ratio would be good. In simple words – claim settlement ratio is the number of claims settled by the insurance company out of every 100 claims it has received. Higher claim settlement ratio implies that majority of claims are getting settled. Higher the claim settlement ratio for the company, the better rated the company is in the eyes of the public.

2) Don’t get mislead by “per day premium” marketing gimmick

A lot of insurance companies have started to advertise their term insurance plans by sharing the cost per day basis, like 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.

Like it might happen that the advertised premium per day is only for the clients around 25 years and for a policy of 40 years. Your case will be different and the premiums might differ for you, so don’t get trapped by the lure of cheaper premiums.

3) Don’t buy single premium policies

At times, you have to choose between single premiums vs. regular premium while purchasing a life insurance policy. A lot of people think that just because they can afford to pay a onetime premium, it makes sense, but it’s not true.

Other than some cases, it does not make much sense to pay a one-time premium (single premium) while buying a term plan. The best option which will work for most people is the yearly premium. So if your agent is trying to explain to you how a one-time payment will help you save the cost, don’t fall for it.

4) Don’t get over-excited by term insurance riders

“Riders” are great add on with a term insurance plan, but only if you really require them or if they are specific to your case. Don’t add them just because it’s available and gives you a sense of more security. I mean if you travel a lot, the risk of dying in an accident is higher for you, so in that case, you can add an accidental rider. Here are various types of term plan riders

  • Accidental Death Rider
  • Permanent & Partial Disability
  • Critical Illness
  • Waiver of Premium
  • Income Benefit Rider

In the same way, 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 don’t add any term insurance riders for the sake of it.

5) Buy the basic version of the term insurance plan

A term plan comes into various flavours nowadays. The most basic one is the one which pays you a lump sum on death. However, there are other variations now which also gives you income for 10/20 years along with the main cover, or pays only the income for the next 10/20 years and a small lump sum at the time of claim.

I think one should just choose the base policy in most of the cases. Most of the other options are designed for very specific situations and they are not “better” or “bad” compared to the base policy. To check this, you can go to any term insurance premium calculator and find out the premium with rider and without a rider.

6) Tell them if you are a smoker/alcoholic

One of the worst things you can 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. There is nothing like a best term insurance plan for smokers in India at the moment.

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.

If you smoke (even though fewer number of times), you are a smoker in the eyes of the life insurance company. Same is the case with those who take alcohol.

Make sure you fill your own form because there have been cases when an agent just mentions the policyholder as non-smoker or non-alcoholic to make sure the policy is easily issued.

7) Don’t hide your health information

Another grave mistake done by policy buyers 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 then you should clearly communicate that to the insurance company. One of the reasons for term insurance claim rejection is hiding important facts while purchasing the policy. Please don’t wait for the insurance form to ask you the exact details.

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 onus of providing all the information is on you.

8) Don’t hide your family health history

Even your family health history matters. If your parents or siblings have some illness, then even that should be shared by you. Please don’t hide it because even that information impacts your premium. Many people think that just because their parents had diabetes, it does not matter at all. That’s not true.

9) Don’t take small insurance cover (like 10-20 lacs)

Do you know that the average sum assured per India is in the range of Rs. 90,000 to 1 lac only? Indians on average are highly uninsured, however, that’s mostly true for those who do not have term plans. But even those who have term plan try to cut the corners and eventually take less term insurance cover.

The most favourite number nowadays is Rs. 1 crore. I see most of the people just taking a 1 crore term insurance plan thinking that it’s the right number. No, it’s not the case.

With the rising costs and lots of aspirations, Rs. 1 crore might not be enough for most of the families all their life. I suggest you should take a good enough cover which gives you enough peace of mind. Make sure you add up all your liabilities, 300 times of your monthly expenses and some more amount which can help your family reach your other financial goals and take at least that much cover. If your life insurance requirement is Rs. 1.3 crore, better take a 1.5 crore plan and not 1 crore.

10) Don’t forget to add nominee’s name

While filling the insurance form, make sure you carefully put the nominee’s name. But who can be a nominee in insurance? Ideally, it should be wife, children or someone whom you want to pass the term plan money. But try to avoid very old people as the nominee (in general).

Also make sure you mention this fact in your WILL too, or if you are not going to create a WILL right now, you can take the life insurance policy under MWP Act, so that your nominee will be the final person (it can only be wife and kids if you add MWP) who gets the money.

If you have bought the term plan long back and now your preference has changed, it’s better to change the nominee’s name.

11) Don’t take more than 1-2 policy 

You should ideally have 1 term plan policy in your life insurance portfolio, the max can be 2 policies. But nothing more than that.

I have seen some people dividing their 2 crores of the cover into 4 policies of 50 lacs each with 4 different companies and it’s a little bit of stretch. In almost all cases, 1 single policy of a big amount is good enough.

However, if you still feel that you want to break it into two policies, that’s the maximum you should do. Also, some people who are going to buy another term plan after a couple of years should not note this point that they should eventually not have more than 2 policies.

12) Disclose the old insurance policy 

When you buy any life insurance policy, it’s mandatory as per their rules to disclose the old insurance policy you already have. In most of the cases, when people buy a term plan for the first time, they already have a couple of traditional insurance plans, but they fail to declare that.

I suggest you don’t do that because as per life insurance policies, a company should know how much coverage you already have and only based on that they will offer you additional cover.

If you have already bought a term plan without mentioning your old policies, you should reach the customer care of the company concerned and share with them about your old policies.

13) Check the policy papers once you get it 

One of the things which you should immediately do after receiving the policy is to check all the fine points and a copy of your medical examination. Kindly go through each point and make sure things like your age, name, blood group, address and other important things are mentioned correctly.

There have been cases, where the information has been wrong. If things are wrong, you can reach out to the company customer care to get it corrected.

14) Communicate to your family that you bought a term plan 

You should share about buying the term plan with your family immediately along with the policy papers and the contact number of the insurer.

You can also write down the claim process on paper and keep that at a safe location and share it with your family. I know it’s not easy to talk about even though it’s the logical thing to do. Nonetheless, at least communicate with your family about the important things they should be aware of.

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