Choosing the best term insurance policy for you
Term insurance plans, which have been gaining popularity in recent times, aren’t easy to pick and you may still find it difficult to select one for you. Here's how you can choose a term plan.
If you are looking to buy an insurance policy to act as a safety net for those who depend on you, term insurance is a good choice. But which is best suited to you and how must you go about selecting one? We’ve explained the need for term insurance and listed out a few tips to help you purchase the right kind for you.
The ‘plain vanilla’ life insurance option
A term plan is basically a life insurance plan, but for a fixed period. As the purpose of the policy is to compensate for loss of income to dependents on the death of the earning person, it is required only as long as a person is earning and has financial responsibilities and dependents. As time goes by, your kids become increasingly independent and your financial responsibilities reduce. By the time you retire, you would have other savings, investments and pension which will be taking care of your needs. A term policy gives protection only as long as you need it. Unlike a money back scheme or a Unit Linked Insurance Plan (ULIP), term plans have no investment component and the whole premium goes towards the cover amount. As a result, the amount of premium is far lesser than what you would pay for a life insurance policy, ULIP or money back policy with the same coverage.
Of the various types of insurance, term insurance has become extremely popular over the last few years. Most insurance companies have reduced the premiums on term insurance plans and they also have online term policies that make it very convenient for buyers to compare plans.
Here are some things you should consider before opting for a term plan:
Amount of cover
Ascertaining the amount of your cover correctly is the first step when it comes to choosing a term plan. If the amount of cover is insufficient, it defeats the main objective of buying insurance. The amount is meant to replace the earnings of the policy holder in case of his/her death. It should cover basic expenses along with key expenses like your children’s higher education and marriage, as well as liabilities such as loans.
Factor in inflation
It is crucial that you take inflation into consideration. Here’s why: Let’s say Mr Dixit is 25 years old and his monthly expenses today come to Rs25,000. If we assume inflation at 6%, he will need an income of Rs80,000 after 20 years, to be able to maintain the same living standards. Add to this, increases in expenses due to marriage, children, and so on, and the amount would be much higher. To resolve this issue, many companies offer plans in which your cover will increase by 5-10% every year. However, the premium of these plans is higher than the standard term plan. Another, more prudent option is to review your needs every few years and top-up your cover if it is required.
Tenure of the term plan
Setting the actual tenure of a term plan is as important as knowing the amount of cover you need. Traditionally insurance plan tenures lasted until a person’s retirement, ie when he/she reached the age of 60. Many policies continue to offer fixed tenures of 10, 20 or 30 years and some don’t provide cover beyond age of 60, regardless of when you take the insurance. However, people are increasingly delaying things like marriage and kids and, as a result, 65 is the new 60. So stay away from fixed tenure plans and opt for one that offers you a flexible tenure which can be moulded to suit your needs.
Most insurance companies allow you to purchase their term policies online. There are two benefits of choosing an online policy: one, you can analyse all the available plans before you choose; and two, premiums are lower as companies save on brokerage cost and can pass on this benefit to the consumer. However, do ensure that the company from which you purchase the plan has a claims system in place for online policies.
Claim settlement record
Always look at the settlement record of the company whose insurance plan you’re thinking of buying. This rule of thumb holds not just for term plans but for any insurance product.