10 Things to Consider Before Buying Term Plan

We all know how important it is to have financial protection to deal with uncertainties. The global COVID-19 pandemic has triggered a sense of life’s uncertainties and made us realise how important it is to be financially well-prepared for any unforeseen events, irrespective of our age. During the pandemic, many lives were lost. With the emotional trauma, many families would have suffered financially due to the loss of income. It is now very clear in the minds of everyone that financial protection against the eventualities of life is extremely important. Term insurance, which is the pure protection plan, is an important necessity for every breadwinner of the family.

Term insurance buying is not that simple. With so many life insurance companies in the Indian insurance market, you are spoilt with choices. There are various term insurance plans available at varying premiums and benefits offered. Term insurance plans also come in many variants, which you can choose based on your need and requirement. You can buy term insurance online after research and careful comparison based on the benefits, features, premium amount, etc. However, while making such an important financial decision, it is important to make the right choice. You need to consider some important factors or things while purchasing term insurance to make a rational decision. Let’s take a look at the four important factors or things to consider prior to buying a term insurance policy.

Establishing the coverage requirement is extremely important as it has to be adequate to provide financial stability to your loved ones when you are not around in this world. Sum assured is the coverage amount or the death benefit that your family or loved one would receive in case of your sudden demise during the policy term. You need to assess your family’s future financial needs based on various aspects to decide the insurance coverage you need. You can assess your coverage requirement based on your age, financial obligations, family’s future goals, your family’s basic expenses and lifestyle, estimated expenses for the future such as education expenses, etc. You can use a human life value calculator or term insurance calculator available online to assess your coverage requirement.

Once you know the coverage requirement, it is also important to factor in the inflation to keep up with that and maintain financial security even during rising inflation scenarios. Generally, the coverage requirement is assessed as multiples of your current income. The lesser the age higher your coverage requirement, and vice versa.

For example, if you are in your late 20s or early 30s, your coverage requirement would be 20 times your annual income. If you are in your early 40s, you would need 15 times the annual income as your term cover. As your age increases, your coverage requirement will get lower.

The most important thing is to ensure that you do not commit the mistake of under-insuring yourself. You need to choose the right coverage amount to safeguard your family during unforeseen situations.

Deciding the policy term is an important aspect of buying the term insurance policy. Your life would be covered only for the duration you have opted for at the time of buying the policy. Generally, life insurance coverage opts to cover the income loss to the family due to the death of the policyholder, who is the income-earning member of the family. Hence, it is important to opt for term insurance coverage till the age you intend to work. You can select the policy term based on your current age and plan to retire.

That means the younger the age longer it should be the term of your term insurance policy. For example, if you are buying term insurance at 25 years of age, your policy term can vary from 35 years to 40 years. If you are buying at the age of 40, your policy term would be 20 years or more, depending on your plan to retire and your other financial responsibilities.

Buying term insurance coverage early in your career is always advisable as soon as you start earning. When you buy at a young age, you will get a higher amount of coverage at a lower rate of premium due to your good health. It is important to note that the premium remains the same throughout the policy tenure. Insurance companies provide coverage until 85 years of age, which may also vary from one insurance company to another. Choosing the policy tenure wisely plays an important role when purchasing a term insurance policy.

Choosing the right insurance company is extremely crucial when buying a term insurance policy. It is not wise to choose the insurance company that offers the term insurance policy at the lowest price in the market. There are many aspects that one must consider while choosing an insurance company. Those are the claim settlement ratio, the company’s reputation in the market, the solvency ratio, and the financial background. The claim settlement ratio is the percentage of claims that are settled by the insurance company against initiated claims.

It is always advisable to go with insurance companies that have higher claim settlement ratios to avoid hassles in the future for your family. The solvency ratio shows the company’s financial strength or ability to meet long-term obligations. Hence, opting for insurance companies with higher solvency ratios is advisable. Ensure to check the market reputation and financial strength of the company while choosing the insurer. You can get the details on the regulator, IRDAI’s (Insurance Regulatory and Development Authority of India) website. Making the right choice helps you secure your family from future hassles.

Term insurance policies come with many riders, which are optional and can be availed at an additional cost of premium depending on your needs. It is important to add the riders that are relevant and suitable for you only to make the premium affordable for yourself. Some of the riders include critical illness riders, accidental death riders, waiver of premium riders, accidental disability riders, etc. You can add any of these riders to your base plan to enhance the benefits of the term insurance policy. It is important to choose the necessary riders for the policy. For example, if you have a history of critical illnesses in your family, then a critical illness rider would be suitable for you.

Inflation is a crucial factor to consider when buying term life insurance for several reasons:

• Rising Costs:
  The most direct impact of inflation is the increase in the cost of goods and services over time. If the sum assured of your term life insurance does not account for inflation, it may not be enough to cover your family's financial needs when they need it years down the line.


• Future Value of Money:
  A sum that seems substantial today might not hold the same value in the future due to inflation. For example, a sum assured of 1 crore INR might seem enough today, but after 20 or 30 years, the purchasing power of that 1 crore will be significantly reduced due to inflation.


• Increasing Liabilities:
  Over time, your liabilities like home loans, car loans, education loans, etc., can increase. If your term insurance cover doesn't keep up with these rising costs, it may leave your family under-insured.


• Lifestyle Maintenance:
  If you want your family to maintain the same lifestyle in your absence, you need to factor in the lifestyle inflation rate. The cost of living, education, healthcare, etc., is increasing rapidly, and it's important your sum assured reflects this.

To counter the effect of inflation, some insurance companies in India offer increasing term plans. In such plans, the sum assured increases by a certain percentage annually to account for inflation. This ensures that the policy's benefit keeps pace with rising costs over time.

However, such policies come with a higher premium compared to standard term policies. Therefore, it's essential to calculate the projected impact of inflation on your coverage needs before deciding on the sum assured and whether an increasing term plan is suitable for you.

Always consult a financial advisor or insurance expert to understand how inflation might affect your term life insurance coverage. They can help you make an informed decision based on your financial situation and future goals.

When choosing a term insurance plan, you can either buy it directly from the insurance company's office (offline) or from the company's website or through an online insurance aggregator (online). Both methods have their pros and cons, and the choice largely depends on your comfort level, understanding of insurance products, and personal preferences. Here are some factors to consider:

Online Term Insurance Plan:

• Lower Premiums:
  Online term insurance plans usually come with lower premiums compared to offline plans. This is because online plans cut out the middleman and pass the cost savings to the customer.


• Convenience:
  You can buy an online term insurance plan at any time, from anywhere. All the information about the plan is available online, and the process is often faster.


• Comparison:
  It's easy to compare various term insurance plans online. Comparison platforms show different plans side-by-side, making it easier to understand the differences and choose the best one for your needs.


• Transparency:
  The terms and conditions are available for you to read at your own pace. You are less likely to miss critical information or be misled by sales tactics.

Offline Term Insurance Plan:

• Personalized Assistance:
  When buying offline, you can benefit from the assistance of an insurance agent or advisor. They can help you understand complex insurance jargon and guide you in choosing the right policy.


• Negotiation:
  In some cases, you might be able to negotiate the terms or price of the policy with the agent.


• Relationship Building:
  By buying offline, you get to build a relationship with the agent, which might come in handy later when making a claim or resolving a dispute.


• Hand-holding:
  If you are not comfortable using online platforms or find insurance terminology confusing, the physical process can provide reassurance.

Overall, both online and offline channels have their unique benefits. If you are tech-savvy and comfortable doing your research, an online term insurance plan can be a cost-effective and convenient choice. On the other hand, if you value personal guidance and prefer face-to-face interaction, an offline plan might be a better option. The key is to ensure that you thoroughly understand the policy's terms and conditions, no matter how you buy it.

A term insurance plan provides financial protection to the policyholder's family in case of their untimely demise. While different term plans come with various features and benefits, there are some critical features that a term insurance plan should ideally have:

• Death Benefit:
  This is the core feature of any term plan. In the event of the policyholder's death during the policy term, the death benefit (sum assured) is paid to the nominee.


• Term of the Policy:
  Term insurance policies can offer coverage for various durations, usually between 10 to 40 years. Some even offer coverage up to the age of 99 years. Choose a term that aligns with your family's financial needs and your retirement age.


• Premium Payment Options:
  Term plans generally offer flexibility in premium payment options. You could opt for regular premium payments (annually, semi-annually, quarterly, or monthly) or a single premium payment.


• Riders:
  Many term plans offer additional coverage options known as riders at an extra cost. Common riders include critical illness, accidental death and disability, waiver of premium, income benefit, and more.


• Conversion Option:
  Some term insurance policies offer a conversion feature, allowing the policyholder to convert the term policy into a whole life or endowment policy without medical underwriting.


• Terminal Illness Benefit:
  Some insurers provide an option where a portion of the sum assured is paid on the diagnosis of a terminal illness.


• Return of Premium:
  Return of premium policies refund the premiums paid if the policyholder survives the policy term. These plans are more expensive than standard term insurance policies.


• Claim Settlement Ratio:
  This is not a feature of the plan, but an important factor to consider while choosing an insurer. A higher claim settlement ratio indicates that the insurer has a good track record of settling claims.


• Solvency Ratio:
  Again, this is about the insurer, not the plan itself. A higher solvency ratio shows that the company is financially capable of meeting its obligations, including claim payouts.

Remember, while these features are important, the best term insurance plan for you depends on your personal financial situation, your dependents' needs, and your long-term financial goals. Always make sure to read the policy document carefully and consult with a financial advisor if needed before making a decision.

The claim settlement ratio is a key indicator of an insurance company's reliability and the likelihood of a claim being settled by it. This ratio is calculated by dividing the total number of claims settled by the insurer by the total number of claims received (including those pending from the previous year). The result is usually expressed as a percentage.

For example, if an insurance company receives 100 claims and successfully pays out 95 of them, the claim settlement ratio is 95%.

It's important to consider the claim settlement ratio when choosing an insurer because it can give you an idea of the company's track record in settling claims. A higher ratio indicates that the insurer has a good track record of settling claims, which can provide peace of mind that your beneficiaries are likely to receive the payout in the event of a claim.

However, the claim settlement ratio should not be the only factor considered when choosing an insurer. It's also crucial to look at other aspects such as the terms and conditions of the policy, the coverage offered, the premium rates, the company's customer service, and its financial stability. A balance of all these factors will help you choose the right insurer for your needs.

A term plan can play a significant role in achieving your financial goals if aligned correctly. Here's how you can match your goals with a term plan:

• Debt Clearance:
  If you have large debts like a home loan or car loan, a term plan can ensure that these debts are taken care of in case of your untimely demise. Choose a sum assured that is at least equal to your outstanding debts to prevent the burden from falling on your family.


• Family's Living Expenses:
  The payout from the term plan can provide for your family's day-to-day expenses for several years after your demise. Calculate an estimate of the amount your family would need annually and multiply it by the number of years they would need support to determine an appropriate sum assured.


• Children's Education:
  If you have children, one of your primary goals may be to provide for their education. The cost of education, especially higher education, can be quite high. Therefore, your term plan should have a sum assured that can cover these expenses.


• Spouse's Retirement:
  If your spouse is dependent on you, you would want to ensure that they are financially secure in their retirement years. The payout from the term plan can serve as a retirement corpus for your spouse.


• Emergencies and Health Issues:
  Some term plans come with additional riders like critical illness cover or accidental disability cover. If securing your family against such risks is one of your goals, opt for a plan that offers these riders.


• Wealth Creation:
  While traditional term plans don't offer maturity benefits, some plans offer a return of premium option where the premiums paid are returned if you outlive the policy term. This could align with your goal of wealth creation.

Remember, a term plan is a risk protection tool, not an investment. While it helps secure your family's financial future, it should not be the only component of your financial plan. Consider it as part of a broader financial plan that includes investments for wealth creation, an emergency fund, health insurance, and retirement planning. Always consult with a financial advisor to make the most suitable choice according to your needs and goals.

Premium affordability is an important factor to consider when purchasing a term life insurance plan. If you're unable to afford the premiums, it could lead to the policy being lapsed, and you might lose the coverage. Here's how to consider premium affordability:

• Budget:
  Consider your current income, expenses, savings, and financial obligations. The premium should comfortably fit into your budget without straining your day-to-day living expenses or your ability to save and invest for the future.


• Coverage Needs:
  While affordability is essential, it shouldn't compromise on the coverage you need. Your term plan should have a sufficient sum assured to cover your family's financial needs in your absence. If a high coverage plan's premiums are unaffordable, consider ways to adjust it like opting for a longer payment term or reducing non-essential riders.


• Premium Payment Mode:
  Term insurance policies generally offer flexibility in premium payment options – annually, semi-annually, quarterly, or monthly. Choose the one that best suits your financial situation.


• Policy Term:
  A longer policy term may increase the premium amount, but it also extends your coverage period. If you need a long-term coverage but the premium is unaffordable, consider options like decreasing term insurance where the sum assured decreases over the term, typically reducing the premium as well.


• Consider Income Growth:
  While determining affordability, factor in your future income growth. What seems like a heavy premium today may become more affordable as your income increases.


• Lifestyle:
  Habits like smoking or heavy drinking can significantly increase the premium amount. Leading a healthy lifestyle could help lower the premiums.


• Online Plans:
  Online term plans often have lower premiums compared to offline plans as they save on agent commissions and administrative costs.

Remember, it's crucial to ensure that the policy remains active by paying premiums regularly, or else the policy might lapse, and the coverage may cease. Always read the policy terms and conditions carefully, and consult with a financial advisor if necessary to understand the implications better.

A term life insurance policy is one of the simplest and most cost-effective forms of availing financial protection for your loved ones against the uncertainties of life. Along with the higher protection cover for your family in time of need, a term insurance policy also gives you tax benefits^* under Section 80C of the Income-tax Act, 1961. Along with considering all the above factors/things, it is important to provide all the right information to the insurance company without hiding any important information to avoid problems in the future. Providing the information correctly ensures fewer chances of claim rejection. Term insurance is a must-have cover to safeguard your loved ones. Keep all the important things in mind while purchasing the policy to make the right choice.