In today’s uncertain times, life insurance has become an essential investment for most individuals. A term life insurance policy protects the insured individual’s family in case of any unforeseen event. A term plan is simple and cost-effective among various life insurance products.
However, due to lack of awareness surrounding these, there are some common mistakes that people make while buying term insurance. Here, we will explain term life insurance in layman’s terms and also highlight 5 major mistakes that should be avoided while investing in a term life insurance.
What is a term insurance plan?
A term life insurance plan compensates the family or nominee of the insured individual in case of his/her unfortunate death during the policy term. The sum insured is paid as a death benefit to the family or nominee once a death claim is filed with the insurance company. The policyholder must ensure timely premium payments for his/her family or nominee to receive the death benefit in case of an unfortunate event.
5 major mistakes to avoid in term life insurance investment
Here are the top 5 mistakes that must be avoided while investing in a term life insurance:
1. Choosing insufficient term insurance cover:
The fundamental idea behind any form of insurance is to gain financial cover for self and dependents. The same is applicable to a term plan as well. However, many people do not appropriately estimate their requirements and settle for a low cover.
While buying a term life insurance policy, one should ideally go for a cover that is at least 8 to 10 times his/her annual income. It is also alright to opt for a cover that exceeds this amount if the family or dependents may require additional funds. However, anything below this amount could be insufficient in the long run.
2. Opting for shorter policy term:
One of the most common mistakes that people make while buying a term plan is choosing a shorter policy term. Often, people are motivated to go for a shorter term since it is inexpensive. However, this can cause trouble in the long run. For instance, if an individual takes a term plan for 20 years at 25 years of age, it will cover him/her until the age of 45. To buy a fresh insurance policy at 45 years, one will then have to shell out higher premiums. With other responsibilities and additional expenses at that age, higher premium amounts could become unaffordable.
It is advisable to opt for adequate terms in life insurance. Instead of being tempted by lesser premiums for a cover of 10 or 20 years, one should pick a policy that covers till at least the retirement age.
3. Delaying purchase of life insurance:
Often, people think that life insurance is only needed after reaching a certain age. This makes most people delay purchasing life insurance. They may purchase term insurance only when they are married or after having kids, or have a family to support. However, it is advisable to buy insurance at an early stage in life. The golden rule to remember is, the earlier one purchases a term plan, the lower the premium amount. There are also lower chances of getting a common lifestyle disease at an early age as compared to when one reaches 30s or 40s.
Experts advise that one should buy a term plan in their 20s. Choose a plan that allows the flexibility to extend cover and modify nominee details at key milestones in life, such as marriage, kids, etc.
4. Not disclosing complete medical information:
In the hope of paying lower premiums, people often do not entirely disclose their medical information or pre-existing medical condition. However, in case of unforeseen death of the insured, if the cause of death is traced back to the pre-existing health condition, the insurance provider may refuse the claim. This could result in financial stress on the family or dependents.
Instead of saving some money on premium, it makes sense to think of long-term benefits to be availed from term insurance cover. Therefore, buyers must always disclose complete information regarding their medical history to the insurance provider.
5. Not exploring options:
The death benefit in any term insurance plan usually remains the same throughout the policy term. However, there are other plan options that have an increasing or decreasing coverage. Some plans also offer an option for the family to get a portion of the sum assured as a lump sum amount and the remaining through regular instalments. Before buying a term insurance, one should look for and consider the available options and choose accordingly.
A term life insurance cover is important, but the requirement of the same may differ across different stages in one’s life. However, if this is not planned carefully, it may not offer the required benefits to the family even after buying the right plan.
To ensure that your family or dependents are financially protected in your absence, be mindful of when, how, and what you select in a term life insurance.
- What should be my Sum Assured / cover in a term plan?
The cover of a term plan depends on factors such as, number of dependents you have, affordability, lifestyle needs of the family, etc. It is advisable to get a cover that is at least 8-10 times your annual income.
- What should be the tenure of my plan?
The tenure of your term plan should be based on several factors. Most plans come with a cover till the age of 60 years and that is an ideal tenure. Read your policy document carefully and be smart enough to understand the value of your policy and how it will benefit your family in case of death.
- Can I modify term insurance?
No, most insurers do not allow changes to term insurance especially with regards to policy duration, premium amount or sum assured.
- Which type of death is covered in term insurance?
Death because of health-related issues or natural death is covered under term insurance plans. If the policyholder’s death is due to a critical illness or medical condition, the beneficiary gets the sum assured as death benefit.
- Can you get money back from a term life insurance policy?
In a regular term insurance plan, the money is paid out to the beneficiary only in case of the policyholder’s demise. In case of term plans with death benefits, the insurer pays the policyholder the entire premium amount upon surviving the policy term.