Ch. 22: Things To Keep In Mind IG

Suppose you want to buy a new PC. You don’t just go to any computer dealer and buy the first one you see, do you? You take your time, read the specifications, look at the screen size, storage capacity, build quality, etc. The features you look for change with your needs. If you are a professional videographer and require a computer for video editing, you would need a light-weighted one with a dedicated graphics card and regular specs. But if you are a gamer, you would need a high-performance heavy-built PC, with more RAM and powerful vents.

It’s the same way with Term Insurance. Just because it’s essential, you shouldn’t impulsively purchase it. There are a few things you must consider before making a decision.

What are these things? Let’s find out!

Things To Keep In Mind Before Buying A Term Insurance Policy

Buy Only If You Need It

Before you decide to buy a term insurance policy, understand the purpose of buying the policy.

The main purpose of buying term insurance is to ensure the financial safety of your dependents or to protect them from any large loan/liability you may have. So, ask yourself - ‘Do you have dependents or visibility of dependents in your life or do you have any loans/liabilities?’

If the answer is ‘no’, then you don’t need to buy a term insurance policy. However, if the answer is ‘yes’, then you must invest in a term insurance policy as soon as possible.

Choose The Right Sum Assured

If you’re certain you need to buy term insurance for your family’s financial security, it is important that you buy a policy with the right sum assured. Why? So that your family doesn’t end up with inadequate cover in your absence.

There are 2 ways in which you can calculate the sum assured your family will require.

Calculate Manually
You can calculate the cover amount manually with the help of this formula -

• Living Expenses Fund (basic needs, groceries, monthly bills, etc.)
  
• ADD Major Expenses Fund (children’s education, wedding, etc.)
  
• ADD Major Liabilities Fund (loans/liabilities)
  
• MINUS Existing Funds (savings, fixed deposits, etc. multiplied by the appropriate risk factors)

To ensure that the sum assured is adequate for your family in the future, you’ll also have to account for inflation. So, you’ll have to multiply the calculated cover amount by 2.5 to 3X. The amount you arrive at will be the gap in your family's safety. You’ll have to subtract that amount from the amount of life insurance coverage you already have (if any), and then get term insurance to cover the shortfall. Learn in detail about how you can calculate the term insurance cover amount in this article:

Use Our HLV Calculator
You can use our Human Life Value (HLV) Calculator.

After you answer a few basic questions, our Human Life Value (HLV) Calculator will churn your inputs and tell you the cover amount that will be suitable for your family - in just 2 minutes!

Know Your Payment Commitment

The next thing you must keep in mind is that you’ll have to keep paying the policy premiums for a long duration. If you miss even one premium payment due date, your policy will lapse and all the benefits under it will cease. Hence, before purchasing a term plan, be prepared and understand that it is a long-term commitment.

Choose The Right Policy Duration

While deciding the term insurance policy duration, take into account your current income, savings, and future expenses. Then, estimate the age by which you would have fulfilled all your financial obligations and created enough wealth to take care of the remaining part of your life. Basically, estimate the age by which you plan to retire. This is the age till which you’ll need a term insurance cover.

So, you can buy a term insurance plan till this age - perhaps with an additional buffer of 5 years.

Premium Payment Term

Generally, you’re required to pay the premiums until the end of the policy duration you choose. But, in case you want to finish paying the premiums early, you can choose the limited pay option. With limited pay, you can complete your premium paying liability in a few years compared to the policy duration you choose.

There are several limited pay options available like 5 pay, 10 pay, 15 pay, etc. If you choose the 5 pay option, you can finish paying the premiums in 5 years. If you choose the 10 pay option, you can finish paying the premiums in 10 years. And so on. Once you complete the premium payments, you can enjoy the cover for the remaining policy duration.

Premium Payment Frequency

In addition to the premium payment term, you can also choose how frequently you want to pay the premiums under your term insurance. Based on your convenience, you can choose to pay your premiums -

• Yearly
  
• Half-yearly
  
• Quarterly
  
• Monthly
  Important: Irrespective of the premium payment frequency you select, make sure you set up auto-debit or standing instructions on your bank account. This will ensure that your premiums are paid on time and your policy doesn’t lapse.

Increasing Cover

As you grow old, your financial responsibilities will keep on growing. You’ll get married, have kids, buy a house, have to pay for children’s education, and so on. In order to meet these increasing responsibilities and ensure that your family is always covered adequately, you’ll need to upgrade your term insurance cover several times too. You can upgrade your term cover in the most optimal manner with the increasing cover feature.

If you opt for this feature, your term insurance sum assured will keep on increasing gradually at specific intervals, until it reaches a maximum limit. This will ensure that your family is sufficiently covered, always.

You can learn in detail about the increasing option in term insurance here:

Married Women’s Property Act

If you have taken loans, and pass away before repaying them, the term insurance claim amount that your family will receive will first be used to settle those loans. Only after all your loans and liabilities are settled, will your nominee receive the claim amount. There could also be family members who could stake a claim, based on succession laws. All this can be very inconvenient - but, there’s a way out.

If you’re married and male, you can buy your term plan under the Married Women's Property (MWP)/ Act by signing an extra addendum. The MWP Act is a welfare act that grants married women specific rights. It will ensure that the claim amount directly reaches your wife and kids before it reaches anyone else. They can then take a call on which payouts to make first and prioritise their needs accordingly.

You can learn more about the MWP Act in this article:

Claim Payout Customisation

If you pass away while the policy is active, the insurer will pay the claim amount to your family. You can configure how you want your family to receive the claim amount. There are several claim payout options available with term insurance. Based on your family’s financial aptitude, you can choose the one you think will be most suitable for them.

Here are some common payout options you can choose from -

Lump-sum Payout Option:
Under this option, your family will receive the entire claim amount in one go. You can choose this option if you have unsettled loans/ liabilities.

Monthly Income Payout Option:
Under this option, the insurer will pay the claim amount in monthly instalments for a specific period. This option will be the most suitable if you are buying the term plan solely to provide for your family’s day-to-day necessities.

Lump-sum With Monthly Income Payout Option:
This is a combination of the above two options. Under this option, the insurer will pay a part of the claim as a lump sum, in one go. They will pay the remaining claim in monthly instalments for a certain period of time.

You can learn in detail about the claim payout options in term insurance here:

Free Look Period

As the name implies, the free look period is a period during which you can freely look over the policy you just bought. You can go through the policy document, terms and conditions, inclusions, exclusions, features, benefits, limitations, etc.

If you’re not satisfied with anything, or come across something that you feel is not right for you, you can return the policy to the insurer. You won’t be charged any penalty or cancellation fee if the policy is returned during the free look period.

Before you opt for a term insurance policy, check the length and the terms and conditions of the free look period provided under the policy - so that you don’t face any hassles in case you want to return the policy.

Grace Period And Revival Period

The grace period and revival period come into the picture when you fail to pay your premium within the due date given by the insurer.

• Grace period is a time period insurers give you to catch up on your premiums. If you don’t pay your premiums even in the grace period, your policy will lapse and all benefits will stop.
  
• Revival period is the time when you can revive or reinstate your expired insurance.

The terms and conditions of both the grace period and the revival period will differ across insurers, so make sure you read and understand them well before making your purchase.

Picking Riders

Riders are easy-to-buy add-ons that you can opt for with your base term plan. They help enhance the scope of your base policy coverage. They will offer an additional payout on the happening of a specific event.

For example, if you buy the waiver of premium due to accidental disability rider, all your future policy premiums will be waived off if you get permanently disabled due to an accident.

Some common riders you can opt for with your term insurance plan include -

• Critical Illness Rider
  
• Accidental Death Benefit Rider
  
• Accidental Disability Rider
  
• Waiver of Premium due to Critical Illness Rider
  
• Waiver of Premium due to Accidental Disability Rider
  
• Surgical Care Rider
  
• Hospital Care Rider

Note: This is just an indicative list. There can be other types of riders available with term insurance, depending on the insurer you choose. Make sure you check the relevant policy documents so you’re well-informed before making the purchase.

Learn in detail about riders available with a term plan in this article:

Nominee Of The Policy

You will have to choose a nominee (or nominees) who will receive the claim amount in the case you pass away while the policy is in effect. You can choose any member of your family as your nominee, including your spouse, children, parents, siblings, etc.

Proper Research And Comparison

Just like you’ll compare the features, limitations, etc. of several computers before you finalise one, before buying term insurance, you must conduct detailed research and comparison. You should compare the various options, benefits, features, drawbacks, etc. of various policies as well as the customer service, past performance, etc. of the insurer. And then accordingly, make an informed decision.

Seek Help From A Financial Advisor

Term insurance is a purchase you make for your family’s financial protection. In order to ensure you don’t go wrong, you must get in touch with a good, credible financial advisor. A good financial advisor will guide you while you buy the policy, help you select the right customisation and features, etc. They will also ensure that your family receives the claim quickly, without any hassles - in case you pass away while the policy is active.

Just like you review every important purchase in your life before going all out, you need to assess your term insurance policy, too, before investing in it. By keeping the above-mentioned points in mind, you can give your loved ones the life and security they deserve - even when you are not around.