9 Things To Consider Before Buying A Term Life Insurance Policy
People frequently ask some questions.
Which Insurance plan should I buy? Term plan or money back plan?
I have already exlpained in this article Term plan:Good deal for future safety, how term plan is far better than moneyback
They asked why?
It is wise step to purchase a term insurance policy for protection purposes because it covers the death risk several times, as compared to a money back policy. No doubt, the sum assured would be returned back in the case of an endowment policy, but the purpose of insurance is defeated as the risk coverage is too low.
My answer is that term plan are cheap and money back plan are costly because If you buy money back insurance policy having annual premium of Rs 130000 for 20 years, you will get a cover of Rs 25 lakhs or so, with the amount returned after 15 years with accumulated bonus etc. But In a term insurance for the same period and same cover you have to pay only Rs 7000 annually.
Some people argue that Premium of Term Plan is waste of money. We will get nothing for our investment.
I explain them that investment in term plan is not a waste of money. Let’s take an example.
Mr A opts for money back insurance plan while Mr B opts for term plan.
| Particulars | Mr A’s case – Money back (Endowment) Insurance Plan | Mr B’s case – Term Insurance Plan |
|---|---|---|
| Age of buyer | 30 | 30 |
| Term of insurance plan | 20 | 20 |
| Sum assured | Rs 25 lakh | Rs 25 lakh |
| Premium per annum | Rs 130000 | Rs 7000 |
Mr A pays Rs 130000 annually while Mr B pays only Rs 7000 annually. Mr B enjoys same insurance cover for same period but save Rs 123000 (130000-7000) per year and invests Rs 123000 in PPF. See the result in following table.
| Particulars | Money back (endowment) plan | Term plan +investment in PPF |
|---|---|---|
| Investment amount | Rs 130000 | Rs 123000 |
| Tax benefit | Yes | Yes |
| Expected return | 4% to 6% | 8% |
| Maturity amount | Rs 4310842 to 5485982 | Rs 6652317 |
| Rate of return in Endowment plan may be between 4% to 6% while rate of return in PPF is around 8% | ||
Now you understood that Term Plan is not a waste of money. If you are planning to buy a term insurance plan, then read this article very carefully, as I am going to explain some points that every term plan buyer should know before they purchase policy.
1. Purpose
Term plan are purchased mainly for protection purpose. People having investment purpose dislike to opt the term plan. But Term plan also serves as investment tool because as shown in above example of cases of Mr A and Mr B, Mr B will get more return as he opts term plan which is fairly cheap in comparison to endowment plan and balance money can be saved in other investment instruments such as PPF, mutual fund, FD etc, which yield higher return.
2. The Insurance Cover
When buying term plan, never try to cut the corners and don’t take small insurance cover (like 10-20 lakh). Never choose a policy that offers the maximum amount of insurance cover because it require to pay a higher insurance premium irrespective of whether or not you need that big an amount to cover you or not. Before planning to buy a term plan, you should calculate your overall expenditure on an annual basis and then choose the insurance policy that suits your expenditure
The most favourite number now a days is Rs 1 crore. To take a 1 crore term insurance plan thinking that it’s the right amount is not wise decision. A simple method to calculate your coverage is to find out 300 times of your monthly expenses and add up your outstanding liabilities to it. At the end you can include 30-40 lakh more into the final number to take care of your other financial goals in future like children’s education etc.
For example a guy with monthly expenses of Rs 50,000 per month and with 20 lakh of outstanding loan will need 300 x 50,000 + 20 lakh = 1.7 crore at the minimum.
3. Compare Premium and other matters
Insurance is a contract and before entering into any contract you must read the terms and conditions thoroughly. Premium is basic part of an insurance policy because this amount has to be paid by the policy taker at regular intervals. So it is advisable that you read and check for the premium amount to be paid before buying a policy. This helps you in knowing if it is feasible for you or not.
Many insurance companies try to tempt the people advertising their term insurance plans by sharing the cost per day basis, like for example – “Buy 1 crore term plan just for Rs 30/day”. But in real these numbers might be applicable only for a certain age group and tenure of policy.
Compare both the price and the level of cover as the cheapest policy isn’t usually the best cover for your needs.
You should compare apple with apple. Study different charges, types and levels of cover when you compare policies. Buying from a comparison site, remember to check the level of cover offered.
5. The Claim Settlement Ratio
The claim settlement ratio indicates
• How reliable the company is.
• How active it is when it comes to settling the insurance claims.
We should never do mistake to ignore the reputation of an Insurance provider before buying an insurance policy. The insurer’s claim settlement ratio, which is the ratio between approved claims to the aggregate claims filed, is an important consideration. When we choose a life insurance company, we should choose the one which has strong presence, along with a good brand. Online reviews and data of company can help us to make our decision.
Study the company in terms of surviving, depth of medical examinations, claim settlement experience, dealing with clients, integrity in conducting business etc.
6. Is this policy suitable to your needs?
Nearly most of us don’t try to know what our insurance covers or consists. Hence, read the policy document. At least check the features that are important to you in the policy. If you think the policy is not as per your requirement, never buy it due to any reason like cheap plan etc and don’t waste your money because you might not be covered when you really need it. Even after your policy issues, you have chance what is called a free look period. During this period, you have a certain number of days in which you can make changes to your policy, or even reject it.
7. Buy the term insurance policy only till your retirement age
Till what age should I buy a term plan?
A person must buy a term plan up to his retirement age because after retirement he will really have no need of life insurance as at that time there will be no many family member dependent on him. As we grow in age, our assets also grow and number of our dependent decrease.
8. Choose wisely term insurance riders
“Riders” are good add on with a term insurance plan. You should choose specific riders if you really require them otherwise not. Don’t add them under temptation.
Example:
If you do lot of travel, the risk of dying in an accident is higher for you. In such a case to opt for accidental rider is really wise decision.
Some riders are listed here for your information.
• Critical Illness
• Waiver of Premium
• Income Benefit Rider
• Accidental Rider
• Permanent & Partial Disability
9. Don’t hide your habits, health and family’s health information
Don’t hide your habit of smoking or alcohol to insurer. Never try to hide any critical health information while purchasing the policy. If you suffer any health issues or gone through major surgeries, you must disclose to insurance company. Hiding such information are the main reasons of term insurance claim rejection.