Term insurance is amongst the most cost-effective life insurance policies available that offer financial support to your family when you are not around. This is a pure life insurance product without any investment component. The life cover, in some cases, may even be opted for up to 100 years of age with a nominal premium. However, it is important to analyze and systematically plan when you are thinking to buy term insurance. The objective is finding the perfect policy that supports your family members.
Here are a few important factors you need to think about when buying such a policy: –
- Required Cover:
You must select an adequate cover amount for your term insurance plan and avoid being underinsured. This policy should take care of the major expenses your family is likely to incur, such as marriage or children’s education, or payment for liabilities like a car or home loan. If you get a term insurance policy with an inadequate sum assured, the whole purpose of ensuring your family’s financial security is defeated. There is no one-size-fits-all answer to precisely what amount of coverage one may require. After all, the financial needs of every family differ from one another.
- Think Future:
If you buy term insurance of INR 50 lakhs and think that amount would be enough to financially secure your family’s future because it does so now, then you need to think again! This amount could have reduced in value in a decade or so due to the increasing inflation rate. Hence, it would be best to consider the inflation factor, the growing needs of the family, their enhancement in the standard of living, etc., before you buy term insurance. The suggestion is to explore a high life cover with pocket-friendly premiums.
- Policy Tenure:
Before determining the term insurance coverage amount, consider – till what age you will need the policy. The tenure must not be too small as the policy may lapse even before your major financial obligations are met. However, this does not mean that your tenure always has to be longer than necessary, as the premium charged for the policy may be higher because of longer tenure, which you may not be able to afford. Ideally, your term insurance policy should have a policy term that is adequate to cover your major debts, important life goals, and earning years. For example, in some cases, a 25-year-old may go for 40-year tenure, while for a 30-year-old, a 30 year-tenure might be sufficient.
- Cost of Coverage:
The term insurance policy you choose must not significantly strain your budget. Keeping up with the premiums will become arduous if you buy a policy that is costlier than you can afford. There are various methods that can give direction on the coverage you should opt for. One such is the Income Replacement method which suggests that the sum assured should be equivalent to your earnings. Another one takes into account the family expenses, life goals, and family achievements. There is an HLV method (Human Life Value) that not just accounts for your income, spending, obligations, and future aspirations but also considers the factor of inflation when suggesting the coverage amount. You can leverage a term insurance premium calculator for HLV-based calculations before zeroing in on any policy. It will help you calculate the premium amount you need to pay for the selected life coverage and tenure and make it simpler to compare the coverage cost for various policies.
After comparing multiple term insurance policy options, you can identify the ones offering high cover at affordable premium rates and subsequently invest in them.
- Add Suitable Riders, if needed: Opting for riders is a type of supplementary benefit in term insurance policies that provides you additional coverage with nominal premium addition. These riders include Accidental permanent total/partial disability riders, family income benefit riders, critical illness benefit riders, waiver of premium riders, and many others. You can easily select any of these riders as per your requirement.
- Claim Settlement Ratio: The moment of truth arrives when your family claims the insurance and gets the benefit of the premiums you paid. You must find a life insurance company with a high claim settlement ratio to ensure this happens. This ratio basically indicates the percentage of claims settled by an insurer during a specific financial year vis-à-vis the number of claims received.
- Solvency ratio: This indicates the insurer’s cash flow and capability to settle claims received. The higher the solvency ratio of the Life insurance company means you can be sure of the company’s financial ability to settle the claims raised by your loved ones post your demise.
Based on the factors mentioned above, you must carefully identify and then buy term insurance. You can always use the term insurance premium calculator, compare multiple policies, and make an informed choice of purchasing a policy either offline in a branch or online with just a few clicks.
