Term insurance plans were made with a relatively straightforward structure: the plan will pay out a sum assured upon the policyholder’s death provided the unfortunate demise happens within the policy term, will provide coverage for up to 65 years, and premiums can only be paid on an annual basis. However, with so many types of life insurance plans available in the market, the customers are spoilt for choice now. Today, there are limited pay plans, increasing cover plans, staggered payout plans, return of premium plans, etc. While having so many options is good, it is getting increasingly difficult for most of us to choose which life insurance plan to purchase. In this blog, we will discuss the most significant aspects to consider while picking a term insurance plan.
Here are the top five things to consider when purchasing term life insurance.
1. Calculate how much term insurance coverage you need:
Your term life insurance policy should be able to provide the same standard of living you are providing them today. For that to happen, you need to estimate how much money your family would require if you died, unfortunately. The best approach to do this is to take a piece of paper and start calculating the following:
- First, calculate your dependent family’s monthly expenses and multiply them by 150. The multiple of 150 factors in future inflation.
- Two, include your responsibilities for home loans, personal loans, and credit card debts, if any.
- Three, deduct all of your existing liquid assets, such as FDs, equities, or mutual funds.
- Fourth, include your projected expenses for significant life goals that are expected to take place within the next 15 years. It could be your children’s higher education or marriage.
- Fifth, include the retirement fund that you wish to leave for your spouse when he or she retires.
2: Determine the duration of your plan:
Once you’ve determined how much coverage you require, you should also know how long you’ll need it irrespective the types of life insurance you opt for. The tenure should not be too short, as the policy may lapse before your financial obligations are completed. At the same time, the duration should not be too long, as the premium paid would be too expensive due to the longer duration.
The correct way to estimate the tenure of your life insurance plan is to determine which year your liquid net worth, i.e. the total investment you have in mutual funds, provident funds, stocks, and so on after subtracting your liabilities, will be higher than your term life insurance cover, which we calculated in the previous section.
The age at which these two figures coincide should be the age for which you require coverage for. Following that, your assets will be sufficient to support your family in your absence.
3. Type of policy:
Life insurance: policies are classified into various types of life insurance, each with its own set of benefits. You must first determine your wants and goals before selecting the coverage that best fulfils them. Here’s a quick review of the types of life insurance policies that are compatible with the common financial goals you may have.
- Term Life Insurance: If you want substantial life cover at affordable rates, even if it entails no maturity benefits.
- Endowment life insurance: If you want the benefits of savings and life insurance in one plan
- Unit-Linked Insurance Plan: If you want the benefits of investments and life insurance in one plan.
- Whole life insurance: If you want to enjoy coverage up to the age of 99
- Child Insurance Plan: If you want a life insurance plan that aligns with key events in your child’s life, such as education and marriage.
- Annuity Plan: If you desire a life insurance coverage that also provides retirement benefits.
1. Terms and Conditions of the Policy: There are additional terms and conditions to consider when purchasing a life insurance policy. For example, look into the grace period provided in the case of late premium payments. Find out whether there is a waiting period. Also, consider the policy’s other features, such as nomination, loan availability, surrender charges, and surrender value.
2. Determine the claim settlement ratio: The claim settlement ratio evaluates how efficiently an insurance business processes claims. Higher ratios indicates improved service for policyholders. Leading insurers frequently include claim guarantee conditions, which ensure quick payments if the policy requirements are followed during the claim filing process.
3. Calculate the claim settlement ratio: This ratio measures how efficiently an insurance company processes claims. Higher ratios suggest better service for policyholders. Leading insurers usually add claim guarantee conditions, which promise prompt payment if the policy requirements are met during the claim filing procedure.
Most important, ask yourself-Are you buying the life insurance plan only to save tax?
Life insurance, on the other hand, is still viewed as a tax-saving instrument rather than a means of protection. In fact, the January-March quarter is the busiest for insurance distributors, accounting for over 70% of all business transactions. Insurance is a poor choice for tax savings because it involves a long-term commitment. Tax-saving investments under Section 80C are no different than conventional investments, so the same criteria should be used to evaluate them.
However, the insurance premium will oblige him to continue contributing to the policy, even if he has other, more pressing financial priorities. Many other investment options under Section 80C provide higher returns than life insurance at a lesser cost. The PPF and Sukanya Samriddhi Yojana have no charges, whilst ELSS mutual funds charge only 2-2.5% and provide significantly higher returns than insurance plans, which give only 5-6%. More crucially, choices such as ELSS, Sukanya, and PPF provide investment flexibility, allowing the buyer to invest at any time of year and with any amount that fits his budget.
So we are saying,
Considering and evaluating these factors might help you determine which life insurance plan is appropriate for you and your family. Make sure to consider all of these factors, as failing to do so can result in a substandard outcome. If you are having problems deciding on any aspect, such as the policy tenure or which riders to select, you can always seek the advice of a financial expert to help you through your dilemma.
