Top 5 Factors to Consider Before Buying a Term Plan
A term plan is an essential financial product that ensures the financial security of your family in the case of an untimely occurrence. Although affordability and simplicity make it a favourite among customers, the selection of the right term insurance plan requires thoughtful planning. These are the five primary factors to consider before reaching a decision.
1. Find the Correct Coverage Amount
Fixing the right sum assured is important to ensure your financial future for the family. Always consider the following factors:
– Age: Lesser individuals typically require a long-term policy.
– Economic responsibilities: Ensure the coverage is sufficient to support dependents.
– Future economic commitments: Include schooling fees, and other future major responsibilities.
– Day-to-day expenses: Consider expenses depending on your current lifestyle and inflation.
– Outstanding liabilities: Ensure your policy covers home, personal, car loans, or any other debts.
One of the general guidelines is to take cover that is 10-15 times your annual salary, accounting for inflation, so that the cover is enough for financial protection. It is also important to review future expenditures in the form of healthcare bills, retirement and possibly emergency spending. The goal is to create a financial safety net that will last your dependents if you are no longer around.
2. Determine the Ideal Policy Term
Selecting an appropriate policy term is crucial to provide coverage for your working age. You may choose your policy term according to the following:
a) Your Age
– 20s: Take a term of 40 years or more.
– 30s: A 30-year or more term is recommended.
– 40s: A 20-year or more term is appropriate.
– 50s: Select a term of 10-15 years to get coverage till retirement.
Younger applicants are charged lower premiums since insurers provide better rates when the risk is minimal. Securing a long-term policy at a young age guarantees a lower premium for the entire duration and avoids the necessity of purchasing a new policy at an advanced age when premiums are much higher.
Additionally, individuals can also opt for a policy term that extends up to 85 years for extended coverage.
b) Retirement Plans
If you are retiring at 60-65 years, choosing a policy that covers up to this age provides financial security for your family during your working years. If you haven’t planned your retirement and don’t have enough savings, opt for a term insurance plan with a longer coverage period. Some companies also offer limited pay options, where you pay premiums up to retirement, but the cover is available beyond 60 years.
c) Financial Obligations
Match your term insurance policy with significant financial obligations. If you have a 30-year mortgage, make sure your policy is for the same period to secure your family against financial liabilities in the event of an untimely death. Also, obligations such as children’s education, personal loans, and business commitments must be considered while determining the policy term.
3. Select the Appropriate Payout Mode
Your policy premium is determined by the payout mode. Term insurance policies usually provide:
– Lump-Sum Payout: The full amount assured is paid in one lump sum, better for families having significant financial burdens.
– Monthly Income Payout: A disciplined payout providing a regular income source.
– Combination Payout: A portion is paid as a lump sum and the rest as a monthly payment.
Choosing a payout option is based on the financial literacy of your dependents and their current financial obligations. If your dependents are not financially literate, a structured payout will prevent them from depleting the sum assured too soon. Also, choosing an increasing payout option where the monthly benefit rises with inflation can be advantageous for long-term financial security.
4. Choosing a Reputable Insurer
Choosing the right insurer is as important as selecting the right policy. Evaluate the following before making a decision:
– Claim Settlement Ratio (CSR): A high Claim Settlement Ratio indicates the insurer’s efficiency in settling claims.
– Solvency Ratio: This measures the insurer’s financial stability and ability to meet long-term liabilities.
– Financial Background: Ensure the insurer has a strong track record in handling financial obligations.
– Market Reputation: Search for customer reviews, grievance settlement effectiveness, and service quality.
A respected insurer makes your term insurance policy more reliable and facilitates a hassle-free claim. And, reviewing the insurer’s online services, like paying premiums online, automated reminders, and easy claim filing, can facilitate easier policy management.
5. Evaluate Additional Features and Riders
Riders provide additional protection over the minimum sum assured. Some useful riders are:
– Critical Illness Rider: Pays a lump sum on diagnosis of a covered illness.
– Accidental Death Benefit Rider: Pays an extra amount in the event of accidental death.
– Waiver of Premium Rider: Waives future premiums if the policyholder becomes disabled.
– Income Benefit Rider: Provides a structured payout option to ensure financial security for dependents.
– Terminal Illness Rider: Makes early claim payments on terminal illnesses.
Riders facilitate individualisation according to personal requirements, providing extensive financial protection. Although riders add to the premium, the advantages they provide in the form of increased security outweigh the extra expense.
Other Things to Consider
Protection under the MWP Act
As a married individual, buying a term plan from the Married Women’s Property Act (MWP Act) safeguards the payment entirely for your family and spouse and protects it against creditors. The feature is extremely useful if the policyholders carry business debts or legal liabilities, which would otherwise affect their families’ financial standing.
Free Look & Grace Periods
– A free look period (15-30 days) is provided for you to review your policy and cancel it if it is not satisfactory.
– A 30-day grace period avoids lapse in case you are delayed with a premium.
– Even a revival phase is provided where you can revive a lapsed policy by paying premiums due and completing the intended terms.
Conclusion
Buying a term insurance policy is a wise step towards securing the financial well-being of your family. By thoroughly evaluating the sum assured, policy term, reputation of the insurer, payout options, extra riders, and tax advantage, you can make a suitable choice based on your requirements. A well-structured term insurance policy not only gives you peace of mind but also ensures your loved ones’ financial security even after your death.
