Things to Consider Before Buying Term Insurance in India

When it comes to financial planning, buying a term insurance plan is one of the most critical steps to ensure the financial security of your loved ones in your absence. However, choosing the right plan can be tricky. Making mistakes while selecting term insurance can lead to inadequate coverage, unnecessary expenses, or missed opportunities to secure your family's future.

In this article, we have covered everything you need to know about buying a term insurance plan. We will highlight the key considerations and common mistakes you must avoid to make an informed decision.

Monthly Expenses of Nagesh:

After covering all these expenses, Nagesh was left with ₹10,000. While this amount provided a cushion, Nagesh was concerned about the future. He wanted to ensure his family's financial security for unforeseen events.

Nagesh decided to buy a term insurance plan, which would provide significant life coverage in the unfortunate event that the sum assured would support his family financially. With only ₹10,000 left after expenses, investing in term insurance within his budget was worth it to ensure his family's future was secure.

1. Selecting Inadequate Coverage Amount

Choosing the right sum assured is crucial if you need term insurance for your family's financial security. This ensures your family has enough coverage if something happens to you. There are two ways to calculate the sum your family needs:

i. Manual Calculation

• Living Expenses Fund: Basic needs like groceries and monthly bills.
• Major Expenses Fund: Big costs like children's education and weddings.
• Major Liabilities Fund: Loans and other debts.
• Existing Funds: Savings and fixed deposits, adjusted for risk.

To make sure the sum assured is enough for the future, account for inflation by multiplying the calculated amount by 2.5 to 3 times. Subtract any existing life insurance coverage from this amount to find the shortfall and get term insurance.

ii. Using the HLV Calculator

Answer a few basic questions related to your life. The Human Life Value Calculator will quickly determine the right cover amount for your family.

2. Understand Your Payment Commitment

3. Choosing The Right Policy Duration

4. Premium Payment Term

Usually, you need to pay premiums until the end of your policy duration. You can pay your premiums yearly, half-yearly, quarterly, or monthly at your convenience. You can choose the limited pay option to finish paying sooner. This allows you to complete your premium payments in a shorter time.

There are various limited pay options, such as 5 pay, 10 pay, 15 pay, etc. For example, with the 5 pay option, you finish paying in 5 years. With the 10 pay option, you finish in 10 years, and so on. After completing the payments, you still enjoy coverage for the rest of the policy.

5. Increasing Cover

As you get older, your financial responsibilities will grow. You will get married, have kids, buy a house, and pay for your children's education. You may need to increase your term insurance cover over time to keep up with these responsibilities and ensure your family is always well-covered.

With the increasing cover feature, your term insurance sum assured will gradually increase at specific intervals until it reaches a maximum limit. This ensures your family is always adequately covered.

6. Protecting Your Family with the MWP Act

If you have loans and pass away before repaying them, the term insurance claim amount will first be used to settle those loans. Only after all debts are cleared will your nominee receive the remaining amount. Family members might also claim a share based on succession laws, which can be inconvenient.

However, if you are a married man, you can buy your term plan under the Married Women's Property Act (MWP Act) by signing an extra addendum. This act ensures that the claim amount goes directly to your wife and kids before anyone else. They can then decide how to use the money and prioritise their needs.

7. Claim Payout Customisation

If you pass away while the policy is active, the insurer will pay the claim amount to your family. You can choose how your family receives this amount based on their financial needs. Here are some common payout options:

Lump-sum Payout Option:

• Your family receives the entire claim amount at once.
• It is ideal if you have unsettled loans or liabilities.

Monthly Income Payout Option:

• The insurer pays the claim amount in monthly instalments for a specific period.
• It is best if you want to cover your family's day-to-day expenses.

Lump-sum with Monthly Income Payout Option:

• A combination of the above two options.
• Part of the claim is paid as a lump sum; the rest is paid in monthly instalments over a certain period.

8. Free Look Period

The free look period allows you to review the policy you just bought. It lasts 30 days, during which time you can check the policy document, terms and conditions, inclusions, exclusions, features, benefits, and limitations.

If you are unsatisfied or find something unsuitable, you can return the policy to the insurer without penalty or cancellation fee. Before choosing a term insurance policy, check the length and terms of the free look period to avoid any issues if you decide to return the policy.

9. Grace Period and Revival Period

These periods come into play if you miss your premium payment due date.

• Grace Period: This is extra time insurers give to catch up on your premiums. If you don't pay within this period, your policy will lapse, and all benefits will stop.
• Revival Period: This is the time when you can reinstate your expired policy.

The terms and conditions for both periods vary between insurers, so read and understand them before purchasing your policy.

10. Adding Riders

Riders are add-ons you can buy with your base term plan to enhance your coverage. They provide extra payouts for specific events. For example, if you get the waiver of premium due to an accidental disability rider, your future premiums will be waived if you become permanently disabled from an accident.

Common riders include

• Critical Illness Rider
• Accidental Death Benefit Rider
• Accidental Disability Rider
• Waiver of Premium due to Critical Illness Rider
• Waiver of Premium due to Accidental Disability Rider

11. Nominee of the Policy

12. Proper Research and Comparison

13. Seek Help from a Financial Advisor

How much coverage do I need?

What tenure should I pick?

Can my premium change in the future?

Will smoking affect my ability to buy a plan?

Do term policies cover accidental deaths?

Will the policy cover me if I move abroad?

What happens if I outlive the policy?

What if I miss a premium payment?

1. Underestimating Coverage Needs

2. Overlooking the Policy Term

3. Choosing Based on Price Alone

4. Ignoring Inflation

5. Not Comparing Plans

Buying the first plan you see without comparing it with other options can result in missed benefits or higher costs. Check the product features, the premium for certain coverage, riders available, returns guaranteed or non-guaranteed, the worth of the insurer, claim settlement ratio, etc.

Select an insurer with a credible market image, hassle-free processes and simplified terms and conditions. This ensures the claim process is easy in your absence, and your family doesn’t have to run from pillar to post. 

6. Skipping Riders Without Analysis

7. Hiding Critical Information

Providing accurate or complete information about your health, lifestyle, or habits can lead to claim rejection, defeating the purpose of term insurance. When your nominee raises a claim for the insurance amount, the insurance company will conduct a stringent check before approving.

If they find out that you had neglected to mention crucial medical information while buying the insurance policy, they might reject the claim. This can cripple your family financially in case of your unfortunate demise.

8. Delaying the Purchase

9. Ignoring the Claim Settlement Ratio

Claim settlement ratio refers to the number of claims the insurance company has settled against the ones raised without complications or delays. Focusing solely on premium costs without checking the insurer's claim settlement ratio can lead to issues during claim processing.

A high claim settlement ratio implies a better chance of your claim getting settled. Hence, choose a company with a higher claim settlement ratio.

10. Neglecting to Update the Policy

11. Choose a Suitable Payout Option

Some insurance providers allow you to customise your insurance payout. For instance, you can choose a periodic inflow of money instead of a bulk amount in one go. This can help keep an eye on expenses.

On the contrary, if you have enough faith in the money management skills of your family members, you can go for a bulk payout option. So, decide carefully which one to opt for to ensure wise usage of the money.

12. Fill Your Application Form by Yourself

13. Do Not Shift in Between the Plans

Buying a term insurance plan is a critical decision requiring careful consideration and planning. By considering your financial responsibilities, future goals, and the factors mentioned above, you can choose a plan that offers comprehensive coverage at an affordable price.

Avoid common mistakes like underestimating coverage needs, hiding information, or ignoring the policy details. Take the time to compare plans, understand the benefits, and select an insurer with a good claim settlement ratio.

Remember, term insurance is not just a financial product; it promises your loved one's security and peace of mind. Choose wisely to ensure their future remains secure, no matter what life throws your way.