9 Essential Things to Consider Before Buying a Term Insurance Plan

Term insurance is a financial safety net that offers protection against life's uncertainties, including the grim realities of death, disease, and disability. While term insurance plans were once quite easy to understand for a layman, the insurance landscape has transformed over time.

Traditionally, the key feature of term insurance was covering them until the age of 65 and providing a lump sum payout upon the policyholder's demise. However, the advent of online term life insurance has given rise to multiple options and features, each designed to cater to diverse needs and individual preferences.

Today, we find ourselves amidst a variety of term insurance offerings, such as limited pay plans, increasing cover plans, return of premium plans, and so on. The availability of these choices undoubtedly empowers consumers, allowing them to tailor their coverage to suit their unique circumstances. However, it also presents a challenge - how does one navigate this sea of options and determine which term insurance plan is the right fit for you?

This article explains the 9 things you should consider before buying a term insurance plan. By understanding these critical elements, you can make an informed decision and ensure that your loved ones are well-protected in times of need.

1. The Insurance Coverage You Need:

When buying a term life insurance policy, your initial focus should be on evaluating your family's insurance requirements. The sum assured, or coverage amount, should be determined based on what your family would need to maintain their current standard of living and meet upcoming financial obligations in the unfortunate event of your untimely demise.

Calculating this sum assured entails several methods, and there is no one-size-fits-all answer. Nonetheless, these are the 4 highly effective strategies that are commonly used to evaluate the appropriate insurance coverage:

1. Human life value

2. Income replacement value

3. Expense replacement

4. Underwriters' thumb rule

Click here to learn more about using these methods to compute the required insurance coverage. Ideally, your life insurance coverage should align with your family's future financial goals, current household requirements, future household needs, and future lifestyle expenditures. Purchasing a life insurance policy without a comprehensive understanding of your family's needs can lead to financial strain, either due to an underestimated coverage or the burden of hefty premiums for a longer policy duration.

2. The Term of the Policy:

After determining the required coverage amount, choosing the appropriate tenure for your term life insurance plan becomes crucial. This tenure should strike a balance - it should neither be too short, risking policy lapses before fulfilling your financial commitments, nor excessively long, resulting in high premium costs.

A prudent approach to assess the tenure of your term insurance plan is to identify the year when your total investments in assets like mutual funds, provident funds, stocks, and other holdings, minus your total liabilities (unpaid loans), surpass the sum insured.

You need the coverage until you reach the age at which the total investment - total liabilities surpass the sum insured. Beyond this point, your accumulated assets will be sufficient to provide for your family's financial security in the event of your absence.

3. Choose the Right Insurer for Your Specific Needs:

A common practice among many individuals is to purchase a term insurance policy based solely on criteria like the highest coverage at the lowest premium or the recommendation of a friend or relative. Nevertheless, selecting an insurance policy based only on any of these criteria may not necessarily guarantee the financial security of your loved ones.

It is advisable to do comprehensive research before making a policy purchase, involving a thorough comparison of various plans. This evaluation should take into account their offerings, benefits, claim settlement record, the efficiency of the claim settlement process, ease of policy procurement and renewal, the reputation of the insurance company, quality of customer service, as well as terms and conditions, among other factors, in addition to scrutinizing the premium costs.

It is worth noting that an insurance plan that may have been well-suited for a friend or relative may not necessarily be the most suitable option for your unique needs. Hence, the process of diligent research and selection is a critical step when buying term insurance.

4. Insurer's Claim Settlement Ratio:

This often-underestimated detail is of utmost importance. The claim settlement ratio serves as a key indicator of the likelihood of receiving your payout when you file a valid claim. Every insurance company presents their claim settlement ratio as a percentage, denoting the ratio of claims they have successfully processed in relation to the total number of claim requests received. It is advisable to choose a life insurance provider with a higher claim settlement ratio.

5. Choose the Best-suited Riders and Add-ons:

Unlike the old-generation term plans, the latest term insurance policies offer several riders and add-ons, apart from the basic death benefit, that can be purchased for an extra premium. These riders and add-ons protect your family from multiple risks. Some of the most useful riders and add-ons are:

- Accidental death benefit rider

- Critical illness rider

- Waiver of premium rider

- Child support benefit

- Guaranteed insurability rider

- Accidental disability rider

- Return of premium rider

- Family income benefit rider

6. Long-term Commitment to Pay the Premiums:

Term insurance is a long-term commitment. Hence, your decisions regarding the insurance plan and the chosen sum assured require thoughtful consideration. The premium you find manageable for the current year may pose financial challenges in the following year. Therefore, it is vital to consider your anticipated future financial stability when determining the ideal premium amount.

Moreover, there may exist a disparity between the insurance coverage needed by your family and the annual premium that fits comfortably within your budget. In such instances, striking a balance becomes necessary, allowing you to arrive at the optimal sum assured and premium combination.

7. Insurer's Claim Settlement Process:

The claim settlement process is yet another pivotal aspect that often goes unnoticed when individuals are in the process of purchasing a term insurance plan. In the unfortunate event of the primary breadwinner's sudden demise, the surviving family members find themselves grappling with both emotional and financial distress.

A quick and easy claim settlement process can significantly alleviate the financial hardships endured by the family. Unfortunately, there have been instances where beneficiaries have given up their insurance claims due to the complicated nature of the settlement process. In such cases, even a good term plan loses its effectiveness, failing to fulfil its intended purpose of safeguarding the family.

8. Mode of Premium Payment:

There are various methods for paying your term insurance premium. Opting for the online auto-payment option is always advisable because it guarantees the timely settlement of all your premiums. Timely premium payment is essential to maintain uninterrupted insurance coverage.

On the other hand, if you opt for an offline mode or a non-auto-payment method, there is a risk of forgetting the premium due date, which could lead to late payment penalties or, in the worst case, the policy lapses.

9. Online or Offline Purchase:

The last consideration to weigh is whether you prefer to acquire term insurance through online or offline channels. Each approach comes with its advantages. If you buy an online term plan, you'll engage directly with the insurance provider, have to do minimal paperwork, and potentially secure a more favourable deal. Generally, online term insurance plans come with lower premiums compared to their offline counterparts.

Alternatively, you can choose to buy term insurance offline. In this scenario, an agent or insurance representative will guide you through the process, and they might extend additional benefits that are not typically available with online plans. It is advisable to thoroughly assess the advantages of both options before making your decision.

To conclude:

Purchasing your first term insurance plan may seem daunting, but the effort invested in understanding your needs and conducting meticulous research to identify the right insurer and the best-suited term insurance plan will ensure you make the right decision.

It is advisable to opt for an online term plan for life coverage rather than an offline plan due to the numerous benefits that it offers.

Furthermore, it is crucial to thoroughly read and understand all the aspects of your chosen policy, including its features, advantages, terms and conditions, the list of exemptions and inclusions, and policy exceptions. This diligence is necessary to avert any future disappointments or disputes.

We are on Telegram! Join thousands of like-minded investors and our editors right now.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.