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10 Factors to Keep in Mind Before Buying a Term Insurance Plan
A term insurance plan is the purest form of a life insurance policy. Here, the sum insured is paid to the agent in the event of the death of the insured during the term of the policy. In the fortunate situation where the insured survives the term of the policy, nothing is payable in most cases. In this sense, term insurance is conceptually similar to a long-term auto insurance policy. There are some term insurance products where the premium is refunded to the policyholder if he survives the period of insurance. These policies are called Term policies with return of premium and would obviously cost more than just a term for the same standard of living insured.
The basic purpose of a term insurance policy is that it should replace the financial loss that a person’s death creates for their family members. So, by definition, a term insurance policy is crucial for a young married man with young children, while it might be less so for a man on the verge of retirement with significant savings and settled children. There are ten important factors to consider before buying a term insurance policy
1. Level of the sum insured: a general rule is 15 times the annual income if one is under 40 years old, 10 times the annual income if one is between 40 and 45 years old, and 5 times the annual income if you are under 40 years old. 45 or more. If you have a large home loan, you should have that loan covered through a supplemental credit life insurance plan, where the insurance company would settle the outstanding loan with your bank in the event of your death. Another approach is Sum Assured = (total outstanding loans + amount required for children’s education and marriage) + (average annual consumer-related expenses) *10. It should also be borne in mind that a person’s earning potential and expenses are likely to increase over the years, and that we have a high rate of inflation which will continually erode the value. Rs 50 lakhs today may seem like a neat sum, but twenty years later it might not be significant at all.
2. Duration of the policy: The younger you are, the longer the duration of the policy you take out should be, synchronizing it with retirement age or the age at which your financial debts would most likely decrease. A rule of thumb that can be used is that the policy term should equal Desired Retirement Age – Current Age.
3. When should I buy: The best time to buy term insurance is NOW. This is because term plans become more expensive as one gets older. The biggest risk is that one could contract certain diseases over time, which makes it difficult to enter a term plan. The insurer can refuse to underwrite the risk or increase the premiums if you have reported a health problem. The future is uncertain while financial liabilities are predictable, and leaving behind a crippling set of financial liabilities for one’s dependents is irresponsible and avoidable.
4. Should I buy additional protection through endorsements: Insurance policy endorsements are like extra toppings on a pizza. A pure insurance policy pays only in the event of death. But there may be situations such as a serious illness or a serious accident that can completely eliminate a person’s earning capacity. Riders such as riders with serious illness or riders with permanent total disability come to the rescue here. These endorsements ensure that the sum insured is paid to the policyholder in the event of any of these unfortunate situations occurring.
5. Who do I subscribe to: Ultimately, an insurance contract is a contract of trust between the insured and the insurance company. You should buy your policy from someone who you believe will best honor the contract at the time of the claim. You can consult the IRDA website to find out the claims reimbursement ratios of life insurance companies. Estimates show that in 2011 approximately 16,000 life insurance claims will be rejected. Price is also a very important variable. Term insurance rates have dropped significantly over the past two years due to price competition and longer life expectancies. Thus, you have a wide choice of more than 20 insurers from which you can buy. Look around aggressively for the company’s offering at the lowest prices. Companies such as Aegon Religare, ICICI Prudential, MetLife, and Kotak Life have the cheapest rates.
6. Where should I buy: Since term insurance rates can vary by more than 50% between different companies, it is important that you do thorough research before buying. Your friendly neighborhood agent may not be the best person to rely on for advice for two reasons: the plan they recommend may be way too expensive, and they will most likely try to push you to buy another product where his commission is higher. Futures products have low commissions for agents. Over the past two years, term insurance rates have dropped by 40-50% due to increased competition and lower mortality rates. In our opinion, the best place to buy a term insurance product is online for the following reasons:
- You can easily compare the features and price of different term insurance plans
- It’s quick and easy, it wouldn’t take more than 10 minutes.
- Medical tests and all other documents would be arranged by the home insurance company itself
- Some companies such as Aegon Religare, MetLife, and ICICI Prudential have exclusive products only for online sales where commissions are lower, and therefore the product is cheaper than offline products. Sometimes the online version can be cheaper than the offline variant by up to 30%!
- Online products will gradually become cheaper than offline products, as the buyer profile of online policies will have a lower risk rating
- You can easily pay the premium by credit card or net banking
Internet and Mobile Association of India (IAMAI) estimates that around Rs 600 crore of insurance premium was paid online in 2010. While part of that would be renewal premiums, a significant part of that would be new term and health insurance policies purchased online.
7. What information should I disclose? It is imperative that you disclose all relevant information truthfully. Even a small half-truth might be enough reason for the insurance company to reject the claim later. You should keep the following factors in mind when completing the proposal form:
a. Disclose your medical history in detail: Do not hide anything. If you have a pre-existing condition, mention it clearly. In the event of death which the insurance company believes to be due to an undisclosed pre-existing condition, the claim will be denied. This is especially true in non-medical cases
b. Also disclose your family medical history
vs. If you smoke or drink, say so clearly. Also provide your exact physical parameters – height, weight, etc.
D. Indicate precisely your income and your profession. If your profession puts you at higher risk (e.g. armed forces, mining, etc.), state this clearly
e. Clearly mention any other insurance policies you may have
F. Make sure to submit authentic copies of PAN card details, birth certificate, proof of income etc.
g. Try to fill in the proposal form yourself and don’t leave it to the agent
8. Multiple insurance policies: It is better to have two insurance policies of Rs 25 lakhs each than to have one policy of Rs 50 lakhs. This way, you may have the flexibility to continue with lower coverage if at some point you have a reduced need for term insurance.
9. Who should be the beneficiary(ies) of the policy: The family members who would be most affected in the event of death should be the beneficiaries. In most cases, this would be the spouse, children or parents. You can also allocate different percentages of the sum insured to the beneficiaries, for example 50% to the spouse and 50% to the parents
10. Pure term insurance or savings-linked insurance products: The primary purpose of life insurance is to provide financial protection to applicants. Only after the angle of protection has been covered by a term insurance plan should one consider saving or investing through a life insurance policy.
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