Buying the right life insurance cover is one of the best thing you can do to protect your family in case of any emergency and there is nothing better than a good term insurance plan.
The term plan offers you a good amount of insurance cover at a very nominal price because it is a plain vanilla product but still people make many mistakes while buying it thereby putting their family’s well-being at risk.
Let us understand the important tips before buying a good term insurance plan and what mistakes to avoid:
Premium & Death Benefit
Awareness about having a good term insurance plan has increased manifold, but still there are many who keep worrying about the return on a term plan.
As you know, a term plan offers you a cover in case of death but in case if a person survives the entire duration of a term plan then there is nothing which will be paid in return and the said term policy will get terminated on maturity.
Though there are options which offers you “Return of Premiums” in case a person survives the maturity but it comes at an additional premium and practically it doesn’t make sense to go for this option because if you look at the time value of money i.e. return of the premiums paid till maturity, then the math does not add up to provide you the benefit.
The additional cost you pay for this option can be invested elsewhere to optmise the overall returns, so always go for a pure vanilla term plan without a return of premium option.
When is the right time to buy a term plan & how much cover is needed?
Well, the right time to buy a term plan is when you have someone depending on you financially like your parents or a sibling and the second-best time is today. Likewise, with the increase in your liabilities and dependents like getting married, having kids or going for a home loan etc. requires you to suitably increase your cover at every stage of your life.
The amount of life cover can be worked out either by using the complex calculations or by following a simple thumb rule of buying a cover equivalent to ten times of your yearly income.
But what I have observed over the years is the fact that people end up investing lot of time in deciding the right amount than actually buying it or taking care of the other important factors. Yes, one should always be careful and need to do due diligence before buying a term plan but one should not invest too much time in planning. For example, say Sanjay, who earns anywhere between Rs. 10 lakh and Rs. 20 lakh, follows a due diligent process and buys a right cover. But if Sanjay spends most of his time in deciding than actual buying, he may be a victim of paralysis by analysis leading to any emergency which may happen during that time where he doesn’t have a cover or the cover was insufficient.
So, in this case, what Sanjay should do is buy a decent cover of at least Rs. 1 crore soon.
Should you buy multiple policies from different insurance companies?
There is again a good number of people who end up buying term plans from different insurers, for example you would find people buying 4 different policies of Rs 25 lakh from 4 different companies or for Rs 50 lakh from two different insures to ultimately buy a cover of Rs. 1 crore.
But ask yourself the reason as to why people resort to this tactic?
Well, the common notion among people is the misconception that if one insurer won't honour the claim, others may. In reality, if one insurer doesn't honour your claim, why would the other company do because the reasons for rejections will be same in most of the cases.
So, the logic of diversification doesn’t work here the way it works with other investment products because term insurance is not an investment plan but a protection plan. If at all you are not able to control the urge of buying a term plan from multiple insurance companies then do not go beyond two insurance companies, just imagine a situation when you are gone and your family has to run from one insurer to another for registering a claim, that’s the last thing you want them to go through apart from the emotional trauma in case of your absence.
Do you need a rider with a term plan?
Well, the best practice is to buy a term plan which is free from any “if and buts” and adding any rider along with your term plan will add complexities and comes with certain conditions, always. Though, there is no issue in adding a rider as such like an accidental or a critical illness rider by paying a nominal add on premium towards it but as said, keeping your term plan very simple works better and you can always go for a separate policy on critical illness or any other rider.
What should be the term of your policy?
Again, this is an area where people end up buying more out of emotions than logic, like higher the term, better, because one day they will die, so claim will be paid eventually. People buy term plan for as long as 40 years and there is policy which comes cashing on this sentiment which offers cover till 100 years of your life.
Well, look at this like this, you want to protect your family in your absence so having a good coverage in the initial phase of your life is very critical because you don’t have the kind of wealth you need to support your family in your absence, hence the dependency on an insurance plan. But slowly and gradually you have to focus on creating real insurance, real asset which works as an insurance and not policy papers. So, let me ask you, would you buy an insurance policy to protect your family in case you already have say 10/20 crore or inherited assets running in to multi crores? I believe, you may not buy a policy at all, isn’t it?
Though it does not mean that those who are rich or super rich don’t buy life insurance, in fact they may buy a much higher cover but in either case that term has to be decided based on the assets you would create and in what time along with your financial responsibilities and things at stake. You may not want to leave your dependents with large number of policies rather you want them to be secured by leaving solid assets spread across equity, real estate, fixed investments etc. So, in case if you are in your 30s then buy a plan till you want to retire say 50 or till 60 years and aim to create real asset base in the meanwhile. So, based on the stage when you can amass that level, term should be decided, it can always change with the time and changes in your goals or responsibilities.
Nomination & Claims settlement
Almost everyone takes care of the nomination process while buying a term plan but have you ever thought that in case of your untimely death, your dependents who will be under huge emotional trauma have to run from pillar to post in collecting documents and lodging a claim.
Make sure that you should inform your insurance policy details to your immediate dependents and also someone close like your best friend or a close relative whom you can trust that he or she will be there to support your family in getting the paperwork etc. done while you are not there, this is very important.
Which insurance company to buy from?
This is one of the most important parameter and almost everyone looks at the claim settlement ratio but what you need to note is that the claim settlement ratio changes every year and though it is one of a good indicator in deciding which company to buy from, there are other important things you need to be careful too. Please note that all the insurers are governed by the IRDA i.e. Insurance Regulatory Authority of India which makes sure the solvency of these companies.
But yes, going with the trusted known brand with a good track record is always good, just don’t end up buying based on how low premium is being charged by an insurer or any other marketing gimmicks, take your call judicially.
Disclose the right information!
Make sure to provide exact details while filling up the proposal form as any inaccurate details discovered after lodging the death claim may put your claim for a toss. Details about health status like a medical condition affecting your life, or habits like smoking or drinking has to be clearly shared.
Follow these tips and buy the right plan!
Rishabh Parakh is the founder & chief gardener of Money Plant Consultancy