A term insurance plan can be described as the purest type of life insurance policy. The nominee is entitled to the sum insured in the event of death during the policy term. If the insured is able to survive the policy’s term, then nothing will be payable. A term insurance policy is conceptually the same as a long-term motor insurance policy. Certain term insurance products offer a return of the premium if the policyholder survives. These policies are known as Term with Premium Back policies and will cost more than a simple term policy for the same level life insured.
A term insurance policy’s primary objective is to replace the financial loss caused by the death of a person for his loved ones. A term insurance policy is essential for a young married man with young children. However, it may not be necessary for a man nearing retirement who has a substantial savings account and well-situated children. Before purchasing term insurance, there are 10 important things you should consider.
1. The amount of coverage: This is the maximum level of insurance. It should be 15 times one’s annual income if he/she is under 40, 10 times one’s annual income for those aged between 40-45, and 5 times one’s annual income for those who are 45 and over. You should consider adding credit life insurance to your mortgage policy. This will cover the amount of the outstanding loan with your bank in the event of a death. Sum insured = (total outstanding + amount needed for children’s education & wedding) + (average consumption related expenditure) *10. Keep in mind that your earning potential and expenses will increase over time and that inflation will continue to erode value. While Rs 50 lakhs may seem like a large sum today, it could be very small twenty years from now.
2. The policy’s duration: The policy should be purchased for a longer period of time. This will allow you to synchronize it with your retirement age, or the age when one’s financial obligations would most likely decrease. The policy term should equal the Desired Retirement Age – Current age.
3. When is the best time to purchase term insurance? Term plans become more costly as you get older. There is a risk that you might develop certain diseases over time, which can make it more difficult to get into a term policy. If you have disclosed any medical conditions, the insurer may refuse to cover the risk or raise the premiums. The future is uncertain, but financial liabilities can be predicted. It is not prudent to leave behind financial obligations that are crippling for your dependents.
4. Do I need to add Riders protection? Riders are similar to toppings on pizza. Pure insurance policies pay out only on the death of the insured. However, there are situations like a serious illness or an accident that can totally wipe out one’s earning potential. These riders, such as Permanent Total Disability riders or Critical Illness riders, come in handy. These riders make sure that the policyholder receives the full amount insured in the event of any of these unfavorable situations.
Whom should I buy my policy from? An insurance contract is a contract between the life insured, the insurance company and themselves. It is important to buy an insurance policy from someone you trust will honor the contract at the time of a claim. For information on the claims payment ratios of life insurance companies, visit the IRDA website. According to estimates, about 16000 life insurance claims in 2011 will be denied. The price is another important variable. Due to price competition and an increase in life expectancy, term insurance rates have fallen significantly over the past two years. There are more than 20 insurers that you can choose from. You should shop around for the lowest price company. The cheapest rates are offered by companies such as Aegon Religare and ICICI Prudential. MetLife, Kotak Life, and MetLife.
6. Which company should I purchase term insurance from? Term insurance rates can differ by up to 50% between companies so it is crucial that you do your research before making a decision. The advice of your friendly local agent may not be reliable for two reasons. First, the plan he recommends might prove too costly and secondly, he might try to push you to buy a product with a higher commission. Agents who sell term products are paid low commissions. Term insurance rates have fallen by 40-50% over the past two years due to lower mortality rates and increased competition. Online is our recommendation for buying term insurance products.
- Compare the price and features of different term insurance policies easily
- It’s fast and easy – it takes less than 10 minutes.
- The insurance company would arrange for all documentation and medical tests at home
- Aegon Religare and MetLife have products that are only available online. This allows them to charge lower commissions and makes the product more affordable than the offline version. The online version may be as much as 30% cheaper than the offline version.
- Online products will become increasingly cheaper than those sold offline, as online policies have lower risk ratings and a buyer profile.
- The premium can be paid by credit card or net banking.
Internet and Mobile Association of India estimates that approximately Rs 600 crores of premiums were paid online in 2010. A portion of this would be renewal premiums but a large chunk would be new term or health insurance policies purchased online.
7. What information should I disclose? It is essential that all relevant information be disclosed truthfully. A small lie could be enough to cause an insurance company to deny the claim. When completing the proposal form, you should be aware of the following:
a. Describe your medical history. Don’t hide any details. If you have a pre-existing condition, be sure to mention it. The insurance company will reject any claim if the death was caused by a non-disclosed condition. This applies especially to non-medical cases.
c. Describe if you smoke or drink. Also, be specific about your physical characteristics – height, weight, etc.
d. Describe your income and occupation. It is important to clearly state if your occupation puts you at greater risk (eg, mining or armed forces).
e. Include clearly any other insurance policies you may have
f. Submit original copies of PAN Card details, birth certificates, income proof, etc.
g. Fill out the proposal form yourself, and not let the agent do it.
8. Multiple insurance policies: It’s better to have two policies, each of Rs 25 lakhs, than one policy of Rs 50 crores. This allows you to choose to continue with a lower coverage if you have a shorter term insurance requirement.
9. Who should be the policy beneficiary? The beneficiaries should be family members that would be most affected by your death. It would usually be your spouse, children, or parents. Other percentages of the insured sum could be allocated to beneficiaries, e.g 50% for the spouse and 50% for the parents.
10. Pure Term insurance: This is a savings-related insurance product. The primary purpose of life insurance policies is to provide financial protection for the nominees. Only after the protection aspect has been covered by a term insurance policy, one can start to save or invest through a life insurance plan.