How to Choose the Best Term Insurance Plan in India?

Buying a term insurance policy that offers fundamental life coverage and financial security for your loved ones when you are no longer present cannot be ignored. Numerous insurance companies in India offer a range of policies you can purchase at a reasonable premium. However, to fully maximise the advantages of your life insurance, it is important to choose a policy that suits your specific requirements.

This article serves as your comprehensive guide, enumerating the top 10 tips to choose the best term insurance plan in India, ensuring that you won't have any remorse down the road.

Before we move to choosing the best term plan or best insurer, first let's see how you can determine your term insurance requirements:

1. Consider your life stage:

When you are in the process of purchasing a term life insurance policy, your foremost priority should be assessing your family's insurance requirements. The sum assured, which is also known as the coverage amount, should be based on the financial support required by your family to maintain their present standard of living and fulfil future financial commitments in the unfortunate event of your untimely demise.

This computation of the sum assured involves various methods, and there isn't a one-size-fits-all solution. Nevertheless, these are four highly effective approaches that are commonly utilised to calculate insurance coverage:

• Human life value

• Income replacement value

• Expense replacement

• Underwriters' rule of thumb

For more details on how to use these methods to calculate the necessary insurance coverage, please click on this link. Ideally, your life insurance coverage should be in accordance with your family's future financial objectives, current household requirements, upcoming household needs, and anticipated lifestyle expenses. Buying a term insurance policy without a comprehensive understanding of your family's needs may lead to financial strain, either due to an underestimated coverage or the burden of substantial premiums for an extended policy duration.

2. Choose the right insurance term:

Once you have determined the necessary coverage amount, the next step is to select the right duration for your term insurance plan. This tenure should strike a delicate balance, avoiding both being too short, which could risk the end of the policy tenure before meeting your financial obligations, and being excessively longer, resulting in high premium costs.

A prudent method for assessing the ideal tenure for your term insurance plan involves pinpointing the year when the total value of your investments in assets, such as mutual funds, provident funds, stocks, and other holdings, minus your total liabilities (unpaid loans), exceeds the sum insured.

You should maintain coverage until you reach the age at which your accumulated assets, minus your 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. Consider your current and future lifestyle:

It is crucial to understand that when choosing term insurance, you should make your decision based on your lifestyle needs, focusing on factors like your spending patterns and overall standard of living. By gaining a clear understanding of your lifestyle requirements, you can safeguard your family, ensuring that they will not have to face financial challenges in maintaining their standard of living, even if you are no longer around.

4. Do not ignore your existing liabilities:

Another aspect to keep in mind when choosing the best term plan is the consideration of existing loans. Many individuals take loans to accomplish their long-term goals like buying a house and/or car and children's education. In the event of your passing, if your policy term doesn't align with the repayment period or the coverage amount is insufficient, it can pose a financial challenge for your dependents. Therefore, when buying a term plan, it is highly advisable to take into account your existing debts and financial obligations.

5. Choose suitable riders and add-ons:

Riders and add-ons are supplementary features you can purchase with your base policy to offer added coverage or benefits. While these riders provide added benefits, opting for many of them can result in an inflated premium amount.

Conversely, refraining from adding any riders may lead to insufficient coverage and an inability to address particular needs or risks. It is important to thoroughly evaluate the available riders and consider your personal circumstances and requirements before determining which riders and add-ons should be included in your plan.

Striking a balance between the necessity for added coverage and the associated costs is critical to ensure that the chosen riders deliver meaningful advantages and are in line with the policyholder's specific needs.

Here are some popular riders and add-ons you can consider:

- Accidental Death Benefit

- Critical Illness Cover

- Premium Waiver Rider

- Child Support Rider

- Guaranteed Insurability Rider

- Accidental Disability Rider

- Family Income Benefit Rider

While riders like accidental disability and critical illness cover can also be purchased with a health insurance policy, it makes sense to buy them with a term insurance plan. This is because the term plan premium remains the same throughout the policy term, whereas the health insurance premium slightly increases with your age group, making the cost of these add-ons and riders higher over time.

Now that you have assessed your insurance requirements, here are the top 10 tips for choosing the best term insurance plan and insurance company in India:

1. Compare different term plans online:

Many individuals lack the required insurance knowledge, often leading to buying term insurance without a complete understanding of its features and terms. Making uninformed choices when buying or renewing a term insurance policy can result in insufficient coverage and higher premium costs. To avoid such situations, it is advisable to conduct comprehensive research by comparing different plans online based on various parameters such as policy features, benefits, premiums, terms and conditions, claim processes, and more.

Numerous financial websites allow us to compare a diverse range of term life insurance policies from various insurance providers. Moreover, reading customer feedback can provide valuable insights into the life insurance company and its offerings. By leveraging these resources, you can make a well-informed decision and choose the term plan that aligns most effectively with your requirements.

2. Look for the maximum benefits at an affordable premium:

When choosing a term insurance plan in India, it is crucial to ensure that the sum assured adequately addresses your family's financial needs in the unfortunate event of your demise, safeguarding their current lifestyle and future obligations. Simultaneously, it is essential to choose a premium amount that comfortably fits your budget, one that you can consistently pay over the policy's tenure without straining your finances. To make an informed decision, you should compare various term insurance plans, considering coverage, premium, features, riders, and any available discounts. Health and lifestyle factors also play a role in determining the premium, so maintaining a healthy lifestyle is advisable. Long-term considerations are essential, as a slightly higher premium may offer superior value over time due to extended coverage and benefits. In short, you need to secure comprehensive protection for your loved ones while ensuring it remains financially feasible.

3. Choosing between limited pay or return of premiums:

Most life insurance companies offer alluring premium payment options like limited pay or return of premiums. In the case of limited pay, you usually pay close to double the regular premium for 10 years, and post that, you are not required to pay any premium. Whereas in the case of the return of premiums, you end up paying around double the premium for the entire policy term, but in the case of a survival of the policy term, you receive the total amount paid after deducting the taxes.

Both these options, even though they seem profitable as they are advertised to be no-cost term insurance, are not recommended. Remember that life insurance is a tool for your family's financial safety, and the term insurance premiums are quite affordable to everyone. In order to save and invest money, you have several other financial products, such as stocks, mutual funds, bank FDs, bonds, and government schemes, among others.

The amount saved by not investing in these options can potentially give better returns through carefully selected equity mutual funds or other investment choices.

4. Check the claim settlement ratio of the insurer:

The loss of the primary provider in a family can result in significant emotional and financial distress. Nonetheless, a reliable term insurance plan can help alleviate these concerns. When buying a term life insurance policy, the insurer's claim settlement ratio should be a crucial consideration.

A claim settlement ratio represents the percentage of claims resolved by an insurance company compared to the total number of claims received during a specific timeframe. In the event of the policyholder's passing, the nominee or family member files a claim, and the insurance company evaluates it based on their terms and conditions, ultimately either approving or rejecting the claim.

A higher claim settlement ratio implies that the insurer has a streamlined claim process and is more likely to settle your claim. Conversely, insurers with lower claim settlement ratios may not be the best choice, increasing the risk of claim rejection.

5. Check the claim settlement process:

The process of settling insurance claims is another crucial element that tends to be overlooked when individuals buy a term insurance plan. In the unfortunate event of the primary provider's sudden demise, the surviving family members are left dealing with both emotional and financial turmoil.

A quick and easy process for settling claims can substantially reduce the financial burdens faced by the family. Unfortunately, there have been cases where beneficiaries have given up on their insurance claims because of the complicated claim settlement processes. In such situations, even the best-term plan loses its effectiveness, failing to accomplish its intended purpose of safeguarding the family.

6. Pay attention to the Amount Settlement Ratio of the insurer:

The Amount Settlement Ratio (ASR) helps evaluate the efficiency of insurance companies in processing and resolving claims. This metric allows individuals to assess how consistently an insurer delivers timely and accurate financial compensation when a claim is submitted.

It is essential to consider the ASR of the insurer as it is generally easier for insurance companies to maintain a good CSR by approving a maximum of small-amount claims and rejecting high-amount claims. However, ASR determines the total amount claimed versus the total amount settled, which gives a clearer picture of the insurer's capability to settle your claim.

A high ASR signifies that the insurance company handles claims fairly and efficiently, ensuring that policyholders receive their due benefits promptly. However, on the other hand, a low ASR may suggest that the company is either delaying or rejecting claims, potentially leading to dissatisfied customers and harm to the company's reputation.

By carefully considering this ratio when choosing an insurer, you can ensure that your beloved family members receive the necessary financial support precisely when it is most needed in the event of unfortunate circumstances.

7. Check claim rejection ratio and repudiation of the insurer:

Claim repudiation pertains to the rejection of a claim that has already been assessed and is considered ineligible for payment. When a policyholder submits a claim based on circumstances or criteria that fall outside the coverage stipulated in the policy terms, the insurer rejects the claim, resulting in what is termed as claim repudiation. In such instances, the insurance companies are not obligated to provide compensation.

On the other hand, claim rejection occurs before the claim goes through the assessment process. This typically transpires due to policyholders failing to disclose or provide incorrect information, such as details regarding their occupation, pre-existing medical conditions, age, and so on. Additional grounds for claim rejection include lapsed policies, standard policy exclusions, and delays in submitting required documents.

8. Check the insurer's solvency ratio:

An insurance company's solvency ratio indicates its amount of capital in accordance with the risks it has undertaken. This risk is determined by subtracting the company's liabilities from its total assets. Essentially, solvency quantifies the insurer's assets versus its outstanding obligations, indicating its financial stability and capacity to fulfil claims. It provides investors with insights into the company's ability to meet its commitments.

It is vital to differentiate between solvency and liquidity, as they are not the same. Liquidity assesses whether a company can meet short-term debts, whereas solvency indicates its ability to cover all debts, including long-term obligations, reflecting the firm's long-term sustainability. When considering a term plan, it is crucial to examine the insurer's solvency ratio, as it reveals the company's financial inflow, outflow, and overall liabilities. This ratio helps customers choose insurance providers that effectively manage claims and financial responsibilities.

A higher solvency ratio indicates a higher likelihood of the insurer being able to settle claims and meet financial obligations, which is beneficial for policyholders. Whereas a low solvency ratio suggests that the insurance company might encounter challenges in simultaneously fulfilling financial commitments and processing claims. Given that insurance companies regularly process numerous claims, they must have the requisite financial capabilities to handle these claims and manage other financial obligations effectively.

9. Check the common exclusions and exemptions:

Many individuals may not be aware that while life insurance provides coverage for a wide range of causes of death, such as terminal illness and old age, it doesn't include all potential causes of death. Insurance companies generate revenue by collecting premiums from policyholders and, in turn, pay out death benefits, which represent expenses or losses for the insurance firms. By incorporating exclusions, insurance companies can decrease the probability of disbursing death benefits, thus reducing their expenses and losses.

Each life insurance company maintains its own set of exclusions and exceptions. These exclusions are typically the specific events and circumstances leading to death that a particular policy does not cover. Therefore, it is of utmost importance to have a prior understanding of the events and circumstances of death not covered by your policy to prevent disputes within your family after your demise.

Despite constant advice from financial experts, many individuals still tend to underestimate the significance of meticulously reviewing all policy-related documents before procuring an insurance policy. These documents contain vital information about the policy, including product features, terms and conditions, inclusions and exclusions, exemptions, and more, all of which policyholders should read and understand. Neglecting to read the policy document before purchasing a term plan could potentially result in disputes and complications down the road.

Some policy terms may be intricate or challenging to understand, in which case it is advisable to seek guidance from an insurance agent or financial advisor. Their expertise can help clarify any doubts or uncertainties you may have and ensure a comprehensive understanding of the policy before finalising your purchase.

10. The most important thing:

We have seen many cases where the insurer has rejected the claims even though the policyholder had chosen the right term plan and the right insurer for their requirements. The main reason behind this is the policyholder failing to provide the correct personal and health details. When you buy a term insurance policy, the insurer will ask you several questions about your health and lifestyle choices, like whether you smoke or drink and your medical history. Many times, policyholders tend to give acceptable answers and hide their medical history and lifestyle choices, thinking that it will either increase the policy premium substantially or the proposal will get rejected. However, purposefully hiding or trying to conceal the details will result in claim rejection. Hence, it is advisable to provide all the correct details and recheck your documentation before buying the term plan.

To conclude:

Choosing the best term insurance plan is a critical decision that should be made with care and consideration. By adhering to the tips mentioned above, you can empower yourself to make well-informed choices. Remember that a well-chosen term plan not only safeguards your family but also provides peace of mind. It is a safeguard against the uncertainties of life, a financial shield for your nearest and dearest, and a crucial component of any comprehensive financial plan.

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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.