How to choose the right term insurance plan

When we start earning, our family, especially parents, nudge us towards saving money for a rainy day. Over time, friends and colleagues offer their advice on how to go about financial planning. If you have ever been a part of such a conversation, the importance of life insurance is surely discussed. More specifically, those guiding you would prod you to get term insurance, especially if you have financial dependents. The conversation often gets restricted to how it is so easy to buy online and provides tax benefits under section 80C of the Income Tax Act.

While all of it is true, there are other important aspects of term insurance you must know about. Which could make you wonder what the big deal with term insurance is. Here we look at some very fundamental questions regarding this insurance product to help you understand better.

Let us start from the very basics.

What is term insurance?
Term insurance is a type of life insurance, which provides you with a life cover for a defined period. It is the simplest and purest form of life insurance. If you are insured, in case of an unfortunate event, your nominees will receive the pre-defined death benefit. The primary purpose of term insurance is to provide financial security to your loved ones against the loss of income that could arise due to your death.

Who needs term insurance?
The answer to this question depends on a host of factors. As you now understand term insurance is important to provide financial security to your loved ones in case of your death, which would result in a loss of income. If you think about it, the loss of income could also mean that the goals of your family like higher education of kids, or marriage could be impacted. Moreover, if you have some liabilities, like a home loan or a car loan to be repaid, your family members will face the burden of repayment in case of your sudden demise. All of these possibilities can be taken care of by the payout from term insurance to your family. In a nutshell, whether you need term insurance depends upon your family’s financial goals, your financial dependents, and your liabilities. Additionally, some term plans are also offering a cover against lifestyle risks like critical illnesses. Accordingly, if you see yourself at risk of any lifestyle-related ailments like heart ailment or cancer, you should consider a term plan.

At what age should I get term insurance?
Well, the answer to this, is that as soon as you have dependents, family goals or liabilities, you should get a term insurance plan. If you plan for family or liabilities, you should take a term plan right away, or even if you could end up having some in the future. The short answer is, get the term insurance now. Let me explain why. The primary reason being that as you age, the premium you pay for the same cover would increase. For instance, if you are a 30-year-old non-smoker, you can get term insurance for a cover of Rs 1 crore till the age of 60 years, for an annual premium of around Rs 7,400. The same cover for a 45-year old non-smoker would cost about Rs 14,700. Moreover, the premium for term insurance remains constant. This means that if you are a 30-year-old from the example above, you will continue to pay the same premium for the next 30 years, without any change, other than taxes. Here, you should also think of how long will you need the term insurance cover. Ideally, a term insurance cover should be in place at least till your retirement age, or till the time you have financial dependents or financial liabilities like loans.

How do I choose what is best for me?
To understand the answer to this question, you must understand that this could have multiple layers and all of those may or may not apply to you. For starters, in terms of coverage, financial planners suggest having a life cover of up to 20 times your annual income if you are less than 45 years old. If you are older than 45 years, the coverage can be around 15 times your annual income.

Then comes the premium payment frequency. These days, term plans allow you to pay the premiums on a monthly, quarterly or yearly basis. You can also give a standing instruction to your bank for periodic deduction from your account for premium payment. There are also plans available that allow you to pay a one-time premium for your policy. What you need depends upon your cash flow and nature of work. For instance, a regular premium payment, either monthly, quarterly or yearly is more suited to a salaried individual. On the other hand, if you are a self-employed individual with irregular cash flows, you could choose to get a single-premium term plan.

Finally, before deciding upon your insurance provider, also consider the company’s performance. You can easily look up the insurance company’s claim settlement ratio, which is an indicator of how frequently the company accepts or rejects the claims it receives. Insurance companies also disclose their usual turnaround times, which can also help you decide which is a better service provider.

Now that you have come this far, it is important to understand another detail. There are add-on features in term insurance that can be availed using something called a ‘rider’.

How to ensure your family’s financial security?
*The advice could change based on your unique situation. It is a good practice to consult a financial advisor to understand the situation better.

What are term insurance riders?
Riders add value to a basic term plan. As these are not part of the plan per se, you need to purchase the riders in addition to the term plan. Let us take an example to understand riders better. For instance, if you opt for a critical illness rider, you are eligible for an insurance payout from your insurer if you are diagnosed with critical illnesses specified by the insurer. In a regular term plan, the payout happens only to the nominees of the insured, after the demise of the insured. However, in case you take a critical illness rider, the money can also be used for the treatment of that illness.

There are also other riders like the waiver of premium rider, which waives off your future premiums in case of an accident or illness specified by the insurer. Also, there are accidental death benefit riders that provide an additional payout to the nominees if the insured dies in an accident.

To be sure, you might not need all of the riders that your chosen insurance company provides. Choose wisely based on your lifestyle and needs.

How should I buy the term insurance?
Once you have understood what term insurance is all about and where it fits in your and your family’s financial plan, it is time to finally buy one. Then comes the dilemma. Should you buy online or offline? What needs to be noted is that online or offline buying does not change the product. The insurance policy you buy remains the same. That being said, buying online not just makes the buying process easier, but also saves time. Moreover, the process and pricing are transparent compared to offline buying where you have to depend upon everything you are told.

Accordingly, the most clear difference between an online and on offline term plan is the cost you pay. While this may vary from company to company, usually leading insurance companies provide a discount of up to 5% on the premium if you buy the policy online. Another major difference between the two at the time of purchase is the free-look period. This is the time you are given by the insurance company to read and understand your policy in detail and cancel it if you feel you have been sold the wrong or inappropriate product. For policies bought online, the free-look period is 30 days, and it is 15 days for those bought offline.

In terms of claim settlement, policies bought online or offline are given the same treatment by the insurance companies. However, you must ensure that you submit all the correct details at the time of buying the term plan. Misleading or factually incorrect information submitted at the time of buying can result in rejection of a claim, thereby causing unnecessary trauma and trouble to your nominees.