Buying term insurance is not a one-size-fits-all purchase.
It requires some level of deliberation to ensure that the policy aligns with your needs, life stage as well as future circumstances, says Casparus Kromhout, MD & CEO, Shriram Life Insurance Company.
Life insurance plans are financial instruments that primarily provide protection against financial risks.
There are two types of financial risks that one need to be protected against: untimely death and old age.
The untimely death of a breadwinner places a family at a risk for future livelihood expenses.
During retirement years, the income generating capacity of an individual reduces.
Thus, protecting future income is very critical.
In most regular financial planning activities, individuals keep planning for insurance as a low priority especially when it comes to life cover.
This was also highlighted in a recent survey where, of all the respondents who were uninsured, over 70 per cent actually believed that insurance is important, reflecting a gap in the awareness and uptake of insurance plans.
Term insurance plans help in safeguarding a family/nominee against loss of income from a bread winner.
These plans provide pure protection and have no savings involved.
One of the key advantages of term insurance is that a much higher risk cover can be availed by the family in return of a comparatively lower premium.
Term insurance plans can also come with certain variations like the return of premium term policies, where the premiums paid by the customer are returned on completion of the policy term.
For some customers, this may offer better value. Adding riders to the plan also adds benefits to cover additional risk events at a very low cost.
Thus, term insurance is a powerful financial tool.
However, buying term insurance is not a one-size-fits-all purchase. It requires some level of deliberation to ensure that the policy aligns with your needs, life stage as well as future circumstances.
Some key factors to consider while taking term plans:
1. Sum Assured: Sum assured is the key benefit of a term policy.
It refers to the coverage amount or the lump sum that would be paid to the nominee on the death of the life assured.
The sum assured is decided at the start of the policy so determining the right amount is crucial to ensure that one is properly covered.
To arrive at the most suitable coverage amount, one must consider the family's financial needs, including daily expenses, outstanding debts, future goals (such as education or homeownership) and any other financial responsibilities.
Human Life Value is a calculation that can be useful to understand the amount of life coverage best suited for a person; to do so, consider the present value of one’s future income, liabilities and investments.
2. Coverage Term: Coverage term or policy term is the duration for which the life coverage will continue.
It is also the duration for which one would need to pay regular premiums for the policy. That is why one needs to select a term that best aligns with one’s financial obligations and long term goals.
In most cases, it is advisable to get cover of at least up to the earning years of a person.
However, depending on one's earning capability and financial needs, one can also explore longer terms or, in some cases, whole life cover.
The important thing to note is that though a longer term will offer protection for a longer duration, it will come at a higher premium. At the same time, taking a new life insurance policy at a later stage will also cause a high premium due to increased age.
3. Premium affordability: The premium for a term plan primarily depends on three factors -- age of the life assured, sum assured availed and term.
Premiums can vary significantly based on these factors.
A person's current health can also impact the premium amount.
Understanding which premium amount fits your budget is crucial as, in most cases, the premium would be required to be paid periodically.
Thus, the customer should be able to continue premium payment without lapsing of the policy.
It would be advisable to compare quotes from different insurers to find a balance between affordability and coverage.
4. Underwriting: As mentioned above, the current health of a person can impact the premium payment amount.
But it is also crucial to be honest about one’s health while applying for a term insurance plan to avoid any rejection on claim based on false declarations.
If needed, one must undergo a thorough medical check-up and be honest in disclosing one's medical history.
The same applies for declarations on smoking, drinking, hazardous jobs, etc.
It is important to state the true facts to ensure no hassle during the claim process.
5. Claim settlement ratio of the insurer: The claim settlement ratio of an insurer reflects its reliability in processing and paying out claims.
Research and choose an insurance company with a high claim settlement ratio to ensure that your loved ones will receive the financial support they need when the time comes.
6. Riders and additional benefits: A customer can opt for add-on riders or additional benefits that can increase the offerings of your term insurance policy.
Some riders available in the market include critical illness, accidental death and disability riders.
These riders provide enhanced protection against other-than-death risks like a critical illness, etc.
It is generally beneficial to opt for riders, but one must consider the additional premium, if there are any other policies that can cover the said risks and one’s financial plans before deciding.
7. Conditions of a policy: It is crucial to read the offer documents and the policy bond carefully to understand the terms of the policy and the benefits pay out.
Some policies have waiting periods and some might also have exclusions.
Thus, it is important to be aware of these while making an informed decision.
Disclaimer: This advisory is meant for information purposes only. This advisory and the information in it does not constitute distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article or an attempt to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
