It is an undeniable fact that term insurance is imperative to safeguard the financial future of your family. It is something that keeps you mentally free, knowing that they will be taken care of in your absence. At the same time, the premiums you pay are also tax-deductible under Section 80C up to Rs. 1.5 lakh. The earlier you start, the better it is for you since you can get higher coverage for a comparatively lower premium amount. However, there are some common pitfalls that you should avoid while purchasing term plans. Here is a guide to the same in this article.
Things to Avoid While Purchasing Term Plans
Here are some of the most common mistakes that you should bypass while buying term insurance plans.
Error 1 – Choosing coverage based on only basic rules of thumb – There are several thumb rules pertaining to term insurance coverage that you will come across. The commonest recommended option is selecting at least 20x of your yearly income. However, this comes with its own flaws since the amount may be insufficient to meet your specific requirements. You should always calculate the gap between what your family requires and what you will leave for them. Take your own financial goals and other scenarios into account before calculating this amount.
First, calculate your debts and liabilities and then calculate how much your family will require in the future, keeping inflation in mind. Then, add long-term goals like higher education and weddings. Subtract your assets like fixed deposits, investments, savings, and others from this amount. The final figure will be your ideal term plan coverage.
Error 2 – Selecting erroneous claim payout options – In the event of your demise, your family will receive a substantial amount of money that may amount to several lakhs of rupees or even a crore and more. To ensure they can manage this money effectively, it’s essential to choose the right payout option for the claim amount. Examine all the available payout options, including lump sum payments, lump sum and monthly income choices, and only monthly income payouts. Choose the one that is based on the financial acumen and needs of your family members.
Error 3 – Not choosing suitable riders – Term insurance plans can be further beneficial with appropriate riders or add-ons that offer extra amounts upon the occurrence of specific events. They greatly enhance your overall financial protection and come with various advantages for a nominal bump-up in premiums. For instance, a critical illness rider will provide an extra payout in case the policyholder is diagnosed with an ailment that is listed in the policy document.
Other rider options include accidental disability, terminal illness, hospital care, surgical care, accidental death benefit, and more. They greatly expand coverage and are value additions to any term plan. What’s more, if you purchase health-related riders, then you may be eligible to get additional tax deductions under Section 80D.
Error 4 – Choosing an insurance company with the highest claim settlement ratio – While this sounds surprising since it is mostly recommended to go for insurers with high claim settlement ratios, there are specific limitations that should be kept in mind. Firstly, the ratio does not offer any accurate estimation of the customer experience while submitting claims and getting them processed. Secondly, this ratio is also calculated for all insurance plans of the company. Hence, it may not be the most accurate reflection of claims for the term insurance category in particular.
There is sometimes a situation where the insurance company maintains a higher ratio by settling more claims with lower ticket sizes and not claims with higher ticket sizes, such as term plans. Hence, while you should look at the claim settlement ratio, don’t make it your be-all and end-all while evaluating insurers. Look for customer testimonials and reviews instead, and watch out for warning signs regarding sluggish claim settlement, harassment, and so on.
Error 5 – Not filling up the proposal form personally – Insurers give you the term plan based on the information that you provide in your proposal form. Hence, make sure you fill it up yourself without entrusting the job to your agent or any other close relative. Always disclose everything fully, transparently, and accurately. Any concealment of information or incorrect declarations may lead to your family’s claims being rejected in the future.
Concluding Notes
As can be seen, term insurance purchases should be made thoughtfully after investing suitable time and effort into the process. Compare insurers and policies carefully based on multiple parameters, such as coverage in relation to the premium, add-ons, benefits, overall claims experience, and other factors. Purchase the right term plan and secure your family’s financial future.
Anantha Nageswaran is the chief editor and writer at TheBusinessBlaze.com. He specialises in business, finance, insurance, loan investment topics. With a strong background in business-finance and a passion for demystifying complex concepts, Anantha brings a unique perspective to his writing.
