Term insurance policy is one of the simplest forms of life insurance products available in the market. As a popular choice of insurance products available in the market, there is an extensive range of term insurance policies offered by the insurance providers. To fulfill your insurance needs, you can choose to invest in various types of term insurance plans available in the market.Read more
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However, before making an informed choice, it is important to have a proper understanding of how term life insurance works.
Further in this article, we have explained in detail how term life insurance works and what are the things that should be kept in mind before purchasing a term insurance policy.
Term life insurance is a pure protection plan offered by life insurance. In a term plan, insurance coverage is offered in the form of a death benefit to the beneficiary of the policy, in the event of the unfortunate demise of the insured person during the policy tenure. In return for the life insurance coverage offered by the insurer, the policyholder needs to pay a predetermined amount of premium for the policy on a monthly, quarterly, half-yearly, or annual basis. As a pure protection plan, there is no maturity benefit offered by a term insurance policy.
Let’s take a look at what are the things that you should know before buying a term life insurance plan.
The amount of cover you choose should be adequate to take care of the future liabilities of the family, even in your absence. To evaluate how much coverage you should choose to create a financial security net for your loved ones, estimate the monthly expense of your dependent family, and also factor in the future inflation rate. Take note of your annual income and also the liabilities that you hold like repayment of home loan, credit card bills, personal loan, etc. By keeping all these factors in mind, choose an adequate coverage amount for your family that covers all these aspects.
As per the basic rule of thumb, the policy buyer should always choose the coverage amount 10-15 times of their annual income.
Checking the claim settlement ratio of the company is the most important factor to consider while purchasing a term insurance policy. The CSR ratio of an insurance company is determined as the number of claims settled in a financial year divided by the number of claims filed in the same financial year. The higher the claim settlement ratio of the company is, the more reliable the company is. While purchasing a term insurance policy always go for the insurance provider who has a higher claim settlement ratio. This way, you will have an assurance that in case of an eventuality, the claim filed by the beneficiary of the policy will be settled on time and your family will receive the much needed financial support.
Once you know how much coverage you require, it is important to know till what age you need coverage for. The term period of the policy you choose should not be too small as the plan may lapse before all your financial obligations are completed. Similarly, the tenure should not be too long as well because with the increase of policy tenure and age of the insured the premium rate of the policy will also increase. The ideal tenure for a term insurance policy is considered as 30-40 years. This is because as a single breadwinner of the family, your family relies on your income for financial security. By choosing a tenure of 30-40 years you will be able to provide them the right financial protection near to or at retirement.
Besides the basic insurance coverage offered by the term insurance plan, many term insurance policies also offer add-on benefits as riders to increase the coverage of the policy. These riders can be added to the base plan if required by paying an extra premium to increase the policy coverage. let’s take a look at the common rider benefits offered by the term insurance plan.
Accidental Death and Partial and Total Permanent Disability Rider
Accidental Death benefit Rider
Waiver of Premium Rider
Critical Illness Rider
Income Replacement Rider
If required, you can choose any of these riders to avail of the extra benefit offered by the plan. However, make sure that you understand the inclusion and exclusions of these riders before including it in the base plan.
For every individual who has a family to look up to, it is very important to have a term insurance plan to provide then the right financial protection in the long-term. However, make sure that you keep in mind these important points before making an informed decision.
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