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Term insurance plans were introduced with a very basic structure. The plan will offer a death cover, will cover you for up to 65 years and premiums can be paid in only the annual mode then as more insurers started offering, online term insurance plans things started to become a little complex.
Today, there is limited pay plans, increasing cover plans, staggered payout plans, return of premium plans, and dozens of combinations while this profusion of choices is good news.
It is also becoming a problem as most Millennials are unable to decide on which policy to buy. In this article, we’ll separate the wheat from the shaft and identify the most important variables you need to consider when buying a term insurance plan.
1. Identify your Needs and the Term Insurance Coverage you Seek
Your term insurance coverage should broadly assess how many financial resources your dependents will need to have to provide for themselves. If you were to meet an untimely death.
The best way to get started on this is to grab a piece of paper and do the following:
- Estimate your dependent family’s monthly expenses and multiply it 150 times.
- This multiple of 150 factors, future inflation, and is a good way to start the process to add your liabilities on account of home loans, credit card bills, personal loans, etc.
- Deduct any liquid assets that you already have like fixed deposits, stocks, and mutual funds.
- Add your expenses planned on account of important life goals that are likely to happen in the next 15 odd years like your children’s higher studies or the marriage etc.
- Finally, add the retirement corpus you want to leave for your spouse on his or her retirement.
The total of all these will help you arrive at how much of the term insurance cover one should be endeavoring for.
2. Determine the Tenure of your plan
Once you know how much cover you need, it’s important to determine till what age you need the cover for you.
Don’t want the tenure to be too little as your policy might lapse before you are done with your financial obligations. You also don’t want the tenure to be too high because the premium charge from you will be high on account of the higher tenure.
A very good and scientific way of estimating the right tenure for your term insurance plan is to determine by what year your liquid net worth that is the total investments that you have in mutual funds, provident fund, and stocks, etc.
After subtracting, your liabilities will be more than the life insurance requirement.
We have calculated earlier the age at which these two numbers coincide, will be the age until which you need coverage because for start your assets, will take care of your dependents upon your demise.
3. Target to Achieve the Highest Peace of Mind per Rupee of Premium Paid
The premium is one of the most important factors that need to be considered your goal should be to get the highest peace of mind per rupee of premium.
The reason I use peace of mind rather than coverage per rupee of the premium is because consumers often value some key intangibles in decision-making.
This can be things like the stability of the insurance provider or its reputation in the eyes of the policyholder. Since term insurance is a long-term contract often running into 30, 40, or 50 years.
It is important for you to be happy with your decision of insurance provider which will be a combination of premium and your perception of the insurer.
A useful tip here for most insurance companies term insurance policies that are sold online on platforms is cheaper than policies sold offline in branches.
So it makes more sense to purchase term insurance plans online as it gives you a clear premium advantage.
4. Choose your Add-Ons Wisely
Term insurance plans offer riders at reasonable costs which should certainly be considered by you even if it might not fit in your requirements.
There are four major riders that are available which are:
- Additional cover for depth due to an accident for an amount in addition to your basic depth cover shall be paid.
- If you were to die in an accident to critical illness cover where a lump sum amount is paid on the diagnosis of one of the listed critical illnesses with the life insurer.
- Waiver of premium on disability where future premiums are waived off if the policyholder is rendered permanently disabled.
- Waiver of premium upon critical illness where future premiums are waived off on diagnosis of a listed critical illness off the four riders. The two waivers of premium riders come at low premiums while the critical illness rider is generally the most expensive one. You have to run some permutations and combinations to see if the additional benefit match up for the premium charged.
5. Broadly Look at the Claim Settlement Ratio
Claim settlement ratio attracts a lot of consumer attention as it indicates the efficiency at which the policies are being settled.
So when you see a number of 95 percent in the claim settlement ratio column, it means 95 out of hundred claims reported to the insurance company was settled a word of caution.
Here the claim settlement ratio is merely an indication and if this ratio is over 95 percent then the company has been very efficient about settling claims.
You really don’t need to go much deeper into it as to see who has 99 percent ratio or who has 98.5 percent ratio.
It is advisable to use the claim settlement ratio as a filter rather than a key decision making criteria.
Term insurance is long-term contracts that benefit your dependents and it is in your interest to identify the right plans for your family with the use of the 5 considerations explained in this article.
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