Introduction:
Say you purchase a term insurance plan. Your primary objective in this case is to invest in a financial instrument that would replace you in the case of your unfortunate absence, right? Would you really want an error in any aspect of this policy that would/could significantly hamper the financial security of your family?
The best way to avoid any such pitfalls would be to get up and close with the issues and their respective solutions.
| MISTAKES | THE REMEDY |
|---|---|
| Miscalculating Your Coverage | Use a free term insurance cover calculator to compute your ideal cover. |
| Procrastinating Initial Purchase | Buy a term insurance policy at the earliest to get an affordable premium. |
| Neglecting Comparison | Compare term insurance providers and plans. Bank on free comparison tools for tallying plans. |
| Overlooking Fine Print | Look into the restrictions, clauses, survival periods, and exclusions. |
| Treating Term Insurance as an Investment | Term insurance is a protection tool and not one for investment or returns. |
| Not opting for value-adding riders | Recommended riders include - Critical Illness Rider and Waiver of Premium. |
| Choosing the wrong tenure of your plan | Take into account a tenure that covers the financial independence of your dependents, your retirement, and life expectancy. |
What are the common mistakes to avoid when you purchase a term insurance policy in India?
A 1 crore coverage in term insurance, for a tenure of 40 years (25 years to 65 years of age) yields a premium of an estimated ₹10 - ₹11k. Considering the substantial payout for such low premiums, term insurers are not willing to extend you the opportunity to introduce any major changes to your plan after it has been purchased. This stringency in its features only makes it more important to mitigate any possible errors during the purchase of a term insurance policy.
Let’s now take a look at some of the most common mistakes when buying a term plan:
Mistake 1: Miscalculating Your Coverage
Accurate coverage calculation is crucial when it comes to term insurance policies. You really don’t want a shortage of funds for your family in your absence, and neither do you need a redundant financial burden via premiums due to excessive coverage.
The Remedy: Take into account, the following factors when calculating your ideal coverage - your age, dependents, tenure, monthly/yearly expenses, and current financial liabilities. You can also look into a free term insurance cover calculator for this purpose.
Mistake 2: Procrastinating Initial Purchase
“I am just in my 20s, why would I need a term insurance plan?”
If you are thinking along these lines and postponing the purchase of your plan, then it’s time for a Re-Take.
The Remedy: Whether you are in your early or mid-20s, purchase a term insurance plan at the earliest because -
The premium of a term insurance plan gets locked in as per the initial age when you make the purchase. The earlier you buy the plan, the lower the chances of contracting dangerous medical conditions. If you do end up with a lifestyle condition like diabetes or hypertension then you pay even higher premiums. So buying young reduces your premium burden considerably.
| USE CASE | Ravi is a 20-year-old | Rishabh is a 30-year-old |
|---|---|---|
| Chosen cover | ₹2 crores | ₹2 crores |
| Tenure | 40 years (20 years - 60 years) | 40 years (30 years - 70 years) |
| PREMIUM | ₹14k - ₹15k | ₹24k - ₹26k |
So, the more you delay your purchase of a term insurance plan, the higher the premium you pay.
Mistake 3: Neglecting Comparison
Term insurance policies are long-term financial instruments. If you finalise the first-term insurance provider and plan that you come across, you may lose out on a queue of crucial perks that add value to your plan.
The Remedy: Compare all available term insurance plans and insurers before you finalise one. During this research, here are a few pointers that you should take into account -
- For term insurers
- Claim Settlement Ratio (an average of the last 3 years)
- Amount Settlement ratio (an average of the last 3 years)
- Volume of complaints (an average of the last 3 years)
2. For term insurance plans
- Affordability of premiums for the same coverage
- Available riders and their respective charges (preferably - Critical Illness Rider, Waiver of Premium, Return of Premium)
- Availability of some value-adding features like increasing/decreasing term coverage, life stage benefits, terminal illness benefits, zero cost, accidental death benefit, etc.)
Mistake 4: Overlooking Fine Print
Term insurance plans offer significant coverage, but be cautious of restrictions and exclusions in the fine print. Overlooking these details during purchase could leave you with a plan containing irrelevant clauses that limit the full payout of your coverage.
The Remedy: When you select a plan, look into the finer prints of the same. Find out details about permanent exclusions, waiting periods, survival period, and more.
Mistake 5: Treating Term Insurance as an Investment
Say, Ritwik approaches Ditto for a term insurance plan.
Our expert advisors ask him about the number of dependents he has and his current financial liabilities to compute his ideal coverage.
We find him rattled since he is seeking a term insurance policy for the returns via
- Tax deduction benefits, or
- A ULIP or an Endowment plan.
The Remedy: Here is what we will tell him -
Term insurance is NOT an investment product, but rather a PROTECTION TOOL. A vanilla term plan might only offer benefits in case Ritwik
- passes away or
- has a critical illness (provided he opted for a Critical Illness rider), or
- in case of disability.
- during the tenure of the plan.
But it fulfills its primary purpose of being a financial replacement in case he passes away.
Moreover, with plans like ULIP and Endowment plans that offer investment and return options, Ritwik will be taking an option where neither his investment needs will be met fully (with the added fees and the high premiums) nor his dependents needs (since these plans don’t offer a very high death cover)
So it’s best to keep investment and protection tools apart, not risking the corpus that is meant to cover Ritwik’s family in the event of his death (or permanent disability).
Mistake 6: Not opting for value-added riders
Term insurers/agents will suggest that you add any available riders to your plan because that would be financially beneficial for them. However, that would be a mistake - financially and protection-wise.
The Remedy: Of the available rider options in the market, there are only a few that can add value to your existing policy, namely -
a. Waiver of premium - What if you find out that for some reason you will be confined to a bed for the rest of your life? What happens to your job? How will you manage your term insurance premiums? How will you keep it active now that you are unemployed?
The waiver of premium rider helps you out with exactly such situations. While the rider requires a nominal pay that is added to your premium, in case of disabilities, this rider keeps your plan active sans any payment of premium.
b. Critical Illness Rider - The insurer offers you a list of 15-20 illnesses. In the event you acquire any of these ailments, chances are high that there will be a lengthy pause on your occupation and thus, your income.
Under such an event, your term insurer will disburse a substantial amount (pre-decided by you during the purchase of the policy) that you can use however you see fit. (Remember: there are two types of critical illness covers - one that disburses the amount out of your sum assured and the other one that offers a sum up and above your corpus.)
c. Increasing/Decreasing Cover - Generally, term insurance plans are not flexible to allow any changes in your cover amount. But, what if you want to keep an option open for major life stages? Or if you feel that your financial liabilities will be mitigated in the future? An increasing or decreasing coverage rider helps you with exactly this.
d. Terminal Illness Rider - Rashmi had an unfortunate diagnosis of end-stage kidney failure and her prognosis is only 6 months. Say her term insurance plan had an in-built terminal perk or rider added to it. Now, with this diagnosis and the proper documentation to prove the same, the insurer will pay her the cover assigned to this rider/in-built perk.
BONUS Mistake 7: Choosing the wrong tenure for your plan
Amit, a 25-year-old, approaches an insurer and requests that his term plan continue till he is 60 years old because he heard that that’s the best time to surrender a term insurance policy.
However, here’s the thing - there is no particular age till which a term insurance plan “should” be active. The factors that decide the tenure of a plan are completely different for different individuals
The Remedy: Amit, when deciding his term plan tenure should take into account -
- The estimated age after which his dependents will become financially independent.
- The approximate year of retirement.
- Normal life expectancy.
Conclusion
Your term insurance policy tends to have coverage of ₹1 crore or higher (depending on your number of dependents, inflation, etc.). Plus, the amount comes to the defence of your family in case of your absence. With such high risks in play, you do not want to take a chance with choosing your ideal term insurance policy. Reach out to an expert, bank on free coverage calculators, free term insurer plan comparison tool - whatever the approach be - choose a top-notch term insurance plan and a credible insurer.