Introduction:
When you purchase a term insurance plan, you are promised a corpus that will serve as your financial replacement in case of an unfortunate incident that leads to your absence. Since a term plan offers substantial coverage, you need a policy and a term insurer that are credible.
So, when you plan to purchase a term insurance plan, there are some criteria that you need to factor in to make sure you have the best plan in the market for you and your family.
What are the factors to consider while buying term insurance?
1. Determine Your Coverage Needs
The term insurance coverage, during disbursal, should fend for your family, their life stage requirements, and any financial liabilities that they might hold in the future. So, calculate your term insurance sum assured carefully. Take into account - the number of dependents you have, your monthly/yearly expenditures, and the inflation rate.
You can also bank on our free term insurance cover calculator, provide a couple of basic details and get access to your ideal term cover.
2. Choose the Right Insurer
With term insurance, your sum assured is substantial since it’s meant to serve as your financial replacement. However, the amount is disbursed only in the case you pass away, are disabled or have a critical ailment (if you have opted for a critical illness rider that is).
So, a lot rides on your chosen term insurance provider during a phase when you are left incapacitated to do much. So, you need a credible and reliable insurer who won’t ditch you when you/your family need their support the most.
Choosing the right insurer is fairly simple if you check
- Claim Settlement Ratio (take an average of the last 3 years and if it's above 97%, you are good to go. But, not above 100%.
- Amount Settlement Ratio (chalk out the average of the last 3 years and opt for insurers that have an ASR of 90% and above)
- Complaint Volume (the lesser the number the better. If possible try and figure out the industry average for the last 3 years, and choose an insurer that has a lower or equal to the aggregate. A number below 20 is preferable.)
- Riders (available riders are a must-check. Check if critical illness, waiver of premium, terminal illness, increasing cover, decreasing cover, or return of premium riders are available. Any other available riders are welcome notion, but exactly a mandatory situation.)
If you don’t want to do this yourself, here’s our article on the Best Term Insurance Plan.
3. Policy Duration Matters
First things first. There is no ideal age up to which a term insurance policy should be active. It all depends on your dependents and when they are likely to be financially independent.
Having said that the best way to decide your tenure would be to reach out to a term insurance expert and give them details about your dependents, your year of retirement, and your existing EMIs, loans, etc. Let them help you out with the policy tenure.
(You might hear about whole life insurance plans that offer policies till you are 99 years old. While they sound like an umbrella protection offering maximum coverage, they are redundant.
After a certain age, your dependents will become financially independent. So, the premiums you pay towards your term plan could be put to better use in savings or investment options.
4. Payment Options
Term insurance policies offer you multiple payment options - limited pay and regular pay.
Here is an example that can best explain the situation -
| USE CASE: | LIMITED PAY | REGULAR PAY |
|---|---|---|
| Rahul is a 30-year-old who wants to take a term plan till he is 65. | However, he wants to complete the payment of his premiums at the earliest. So, he opts for a limited pay option in which he can pay his premiums by - 5 years, 7 years, 10 years, 12 years, 15 years, or 65 years. | He opts for a regular pay option. He will be paying his premiums till the completion of his tenure. |
There is no right way of picking a payment option. You can choose the variant that best supports your needs.
5. Understand the Fine Print
Your term insurer is offering you sizeable coverage against relatively affordable premiums, so, you have to expect a list of exclusions in the fine print. While some of the terms mentioned in the document are for the benefit of the insurer, some act in your favour too -
EXCLUSIONS -
- War-related activities
- Illegal activities like drinking and driving, drug overdose, etc.
- Terrorist attacks (victim is covered, but not the perpetrator)
- Suicides
POINTS TO NOTE -
- If a policyholder is missing for 7 years or more, he/she is declared dead and the sum assured is disbursed
- As per the Moratorium period, say you have held a policy for 3 years and you never disclosed that you are a smoker. And your term insurer failed to unearth this secret, post the 3 years they can’t deny any claims about this undisclosed condition because they couldn’t detect the same in the moratorium period of 3 years.
(NOTE: Please understand that there is a good chance that term insurers will figure these things out anyway and while they are legally obligated to pay all claims after the 3-year moratorium period, they can still take you to court. And you wouldn’t want your dependents dealing with this. So while not disclosing these might help you save a few bucks in your premium, a sudden exposure of the secret will mean - claim rejection and even policy cancellation.)
6. Age and Health Considerations
There is a reason why we say, purchase a term plan at the earliest. The higher your age, the higher the premium.
Let’s say -
| USER CASES | You are 35 years old and without any pre-existing conditions. You are seeking a ₹2 crore cover till you are 75. | Your younger brother is 20 years old and without any pre-existing conditions. He is seeking a ₹2 crore cover till he is 60. |
| HDFC LIFE | ₹41,305 | ₹16,314 |
| ICICI PRUDENTIAL | ₹33,126 | ₹13,492 |
| MAX LIFE | ₹34,720 | ₹13,708 |
As you can see there’s a substantial difference in premiums. Also, note that the premiums are fixed once you buy a plan. So it makes sense to buy a term plan when you’re young and healthy.
7. Eligibility for term insurance
Term insurance providers are pretty strict when they extend you a plan. They take a look at multiple aspects of your life -
a. Health conditions - Term insurers look into any pre-existing medical conditions that you might have had or have at the moment. They check the questionnaire that you fill in while applying for a term plan and accordingly take a call of whether they should -
- Deny the application
- Present a counteroffer with a reduced cover or increased premium
- Deny riders, or
- Trigger additional medicals
b. Income - Some term insurers decide your maximum eligibility for coverage by multiplying your current income and factoring in your age during the purchase of a plan.
| ENTRY AGE | MULTIPLIER |
|---|---|
| 18 - 35 | 25 |
| 36 - 40 | 20 |
| 41 - 45 | 15 |
| 46 - 50 | 12 |
| 51 - 55 | 10 |
| 56 - 65 | 5 |
So, if you are a 30-year-old, with an annual income of ₹30 lakhs, your maximum coverage = ₹30 lakhs X 25 (the multiplier for a 30-year-old) = ₹7.5 crores.
(Please remember, whatever your maximum coverage may be, your required coverage will factor in different parameters.)
c. Occupation - Not all occupations bear similar risks. With the questionnaire that you will fill in during your application, here is what might happen -
d. Educational Qualification - Term insurers believe the higher your educational qualification, the better chances you have of a stable income in the long run. So, you would be financially capable of paying the premiums well in time.
(Point to note: Even if you have a high income and your educational qualification falls below the required benchmark of eligibility, then insurers may not extend a term plan.)
Here is an example of a 30-year-old and how his educational qualification, income, and type of employment influence his term plan availability -
| EDUCATION | QUALIFICATION SALARIED/NON-SALARIED |
INCOME | TERM INSURANCE ELIGIBILITY |
|---|---|---|---|
| Below Class 10 | Not eligible | ||
| Class 10th passed | Salaried | ₹10 lakh or above | Max Life |
| Class 10th passed | Non-Salaried | ₹10 lakh or above | HDFC Life and Max Life |
| Class 12th pass | Salaried and Non-Salaried | ₹5 lakh or above | HDFC Life and Max Life |
| Diploma | Salaried and Non-Salaried | ₹5 lakh or above | HDFC Life and Max Life |
| Graduate | All insurers offer | ||
| Post - Graduate | All insurers offer |
e. Lifestyle habits - Smokers have been proven to have a lower life span as compared to non-smokers. Subsequently, term insurers charge a hiked premium for smokers.
| Ritam is a 25-year-old seeking ₹2 crore coverage for 40 years tenure. | |
| SMOKER PREMIUM | NON-SMOKER PREMIUM |
|---|---|
| ₹30k - ₹42k | ₹18k - ₹21k |
(If you have been consuming gutka, cigarettes, pan masala, bidi, hukka, or vape in the last 2-3 years, you will be considered a smoker. Please note the sub-clause of this span may differ from one year to the other)
Conclusion:
Getting term insurance is crucial for your family's financial future. When you take the time to think about these aspects and make a smart decision, you can get a policy that gives you peace of mind. This way, you make sure your loved ones are taken care of, even if you're not around to support them anymore.