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How to Choose a Right Term Insurance Plan

We never want our family to suffer at our expense and always pray for their well being. But praying alone won't protect them against all sorts of uncertainties. The onus of giving our family, financial security and protection would always rely on us; the sole earner/breadwinner. Being the breadwinner, it is therefore, amply important to insure ourselves against the unavoidable and undoable act called death.

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None of us ever anticipates death but there has to be a backup plan, just in case the unexpected happens. We have to look out for ways that secure the future of our loved ones. Good news is that an inexpensive and beneficial tool is widely available everywhere and is called ‘Term Plan’. A simple form of insurance that provides death benefit in the form of a sum assured to the family of the deceased. Very nominal yearly premiums have to be paid out by the policyholder to sustain the policy. When it comes to term life insurance, one should carefully assess all the factors like age, health, income, liabilities etc. Here's what you should consider before selecting a term policy:

Why buy Term Insurance early?

Your premium is decided on age at which you buy the policy and remains same, throughout your life

Premiums can increase between 4-8% each year after your Birthday

Your policy application could be rejected or premiums increase by 50-100%, if you develop a lifestyle disease

See how age affects Term Insurance Premiums
See how age affects Term Insurance Premiums
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Make sure your purchase is Need based and not peer based! 

Your selection for a term plan must not be influenced by peers but instead be a result of self analysis of your own needs.

Take the instance of a certain Mr Sudhir. He is 30 years old, works as a software professional in an MNC and draws a salary of Rs.60, 000 per month. The dependents include wife and a 6 month old child. Driven by the urge to earn more and enticed by his peers’ favoritism towards investment plans, he contributes most of his income into investment plans. Rest of his income goes into paying for rents, loans and child-expenses. We are not saying that he shouldn't be putting his money into investment plans, rather planning an investment regime would always be necessary for maintaining a vital living standard, but he must also remember that investments alone won't take care of his family in case of his untimely and unfortunate death. Sudden death with no term life plan and missing income would mean his family would be in for a huge trouble. He, therefore, should not get carried away by his peers' opinion and must put some money in a term cover policy as well.

How much term insurance you need is the question. To figure out the cover amount, let us make an assumption that the cover amount should be 10 times the annual income. Mr. Sudhir's age is 30 and has an annual income of more than Rs.7 lakh, so the chosen sum assured must be around 70 lakh (Taking inflation into consideration and the fact that there would be loss of income an approximate assumption seems of 10 times seems appropriate).

Obviously, the assumption cannot be blindly applied as the sum assured is reliant on other factors such as when you marry (early or late) or have children (early or late) and so on.

In such instances, you should prepare a statement of all assets and liabilities, future goals, etc, and then zero in on a sum that you would like to be assured for.

Buy more policies Online than Offline

While choosing a term insurance plan, determining whether you are buying the plan online or offline would make a huge difference to your purchase. Buying policies online through various comparison portals is advantageous and economical. You get to compare various products in terms of price and other features, there are no intermediaries involved and the policies are cheaply priced. Additionally the decision made is unbiased; the products are not hard sold as they are when insurance agents are involved. Offline plans clearly are expensive, are retailed through insurance agents and hence purchase decision is biased. You can make your choice based on whether the plan is online or offline.

Be specific about the time you would require the cover for

The tenure of the term insurance plan is as crucial as the amount of cover. A term insurance policy must cover a person till the age he wants to work. Till a few years ago, this was 60 years. However, in today's times people might want to work beyond 60. As they are marrying late and are having children at an even higher age. So it is definite that a person would require cover till at least 65 years.

Ideally the individual should decide the policy tenure by taking into account the age he would want to retire at. That is, difference between his assumed retirement age and his current age, should be the policy tenure. Also, it is best to buy term plans while you are young as the premiums are little. The more is the age the more is your premium.

Choose Right Term Plan Choose Right Term Plan

Take Inflation into account

The cover of say, Rs. 60 lakh that one buys today may not be enough for them to survive 10 years later. Don't know, why? Let us understand. Inflation would cause the price of products to rise, which is why it would cause the value of rupee to drop. The value of Rs 60 lakh will only be Rs 38 lakh after 10 years assuming an inflation of just 5%. To curb this problem, some insurers offer plans where the covering amount hikes by 5-10% every year. The periodic increase in the sum assured would help one take care of the increase in income as well as inflation.

Compare the Costs and Benefits of a Term plan

Costs Benefits
Premium costs Rs 6,000-7000 per annum for a 1 crore cover plan. For a little lesser sum assured, premium would be even less. In case of policyholder's untimely death, nominee would get the full sum assured. Even if the death happens after few months or a year of taking the policy, it won't matter.
The per day cost of a 1 Crore term plan is Rs.18. Some insurers give consumer the option to choose the tenure of the policy. You might as well have yourself insured till the time you work. Like till the age of 75
- The cover amount goes through an annual increase of 5-10% per annum which is in line with the increasing inflation.

Purchase decision made on the basis of associated product's cost and benefits is a very informed one. Such comparison brings to fore the pros and cons and lets you know whether the product is value for money or not.

Claim settlement Ratio of Insurance Companies

While choosing a term insurance plan, one of the major points to consider is Claim settlement ratio. Claim Settlement ratio of a company informs you about the number of policies that are settled by paying back the claims in case of death. A company settling 98-99 claims out of every 100 claims each year is the best one. Why? Because a rejected claim defeats the whole purpose of buying the term plan in the first place. It is therefore advisable to look at the claim ratio of an insurer before buying its products. What is also important for a consumer is to be very transparent in disclosing all the details like his health conditions, income, lifestyle etc. while filling the application form. That would negate the possibility of a claim rejection. But even then if your claim gets rejected, you have the option of approaching an insurance ombudsman for justice. Ombudsman is an authority who has the power to scrutinize individual complaints against public authorities, departments, and etc. and even private sector companies.

Term Insurance Plans provide sufficient coverage at reasonable prices. It is, however, necessary for you to first analyze your requirements with respect to age, money, cover and future needs of your family. You need to be absolutely sure about whether or not you want to buy a term plan.

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