by Term insurance is one of the most economical ways to guarantee your family’s financial security after your demise. For a policyholder, it is indeed a long-term commitment that provides your family with an income replacement in your absence while also funding their dreams and life goals. Choosing the right amount of coverage, tenure, and life insurance company are all important questions because they will affect your family’s quality of life after you. It is important that you get everything right from the beginning and avoid blunders when purchasing the plan. One can take the help of a term plan calculator that could help you get the premium amount to be paid easily. In this article, we will be taking a look at some mistakes individuals make while purchasing term insurance and how to avoid them.
- Relying on thumb rules to determine the coverage amount: The most common thumb-rule formula for calculating the term plan coverage amount is ’20X your annual income.’ However, this thumb rule does have some drawbacks that most people don’t talk about. Firstly, it takes into account several factors which may not be applicable to everyone’s needs. Remember that every individual has different financial goals. If you determine your term insurance coverage using a random thumb rule, the chances are very bleak that the amount will be able to meet your family’s financial demand in your absence. Therefore, do not rely on any other thumb rule.
The ideal technique to determine the suitable term cover is to assess the difference between what you’ll leave behind and what your family requires in reality. So, the question is how do you determine this gap?
- Determine how much you owe (short-term expenses, long-term financial goals, loans, or other commitments such as your child’s college fees after they pass out from school).
- Calculate the amount you own (savings, fixed deposits, investments).
The difference between the two will be the amount of money you need to cover with a term plan. And, how much premium you need to pay can easily be calculated using a term plan calculator.
- Selecting the wrong claim payout option: You may have heard stories about lottery winners being bankrupt after losing all of their money through gaming, or investing in the stock market with minimal information, and falling for bogus investments. A hefty term insurance claim payout is no exception. Your family will have a large sum of money in their bank account after your demise. Indeed, managing a huge sum of money is challenging unless they have the necessary skills. If you do not want your family to lose the claim money due to their poor investment decisions that leave them without financial support for their basic necessities, choose the proper claim pay-out option.
Consider all of the choices for customizing the claim pay-out, such as lump sum pay-out, monthly income pay-out, and lump sum plus monthly income pay-out. Then, choose the best one depending on your family’s demands and financial situation and their financial know-how.
- Not opting for the right riders: Riders are add-ons that provide additional funds when a specified event happens. A critical illness rider, for example, will provide an additional payout if you are diagnosed with a serious sickness specified in the policy. Insurance companies under the Term insurance plan offer numerous types of riders, including accidental disability, critical sickness, and accidental death benefit riders.
- Selecting the first option that comes your way: Before purchasing an insurance policy, you have to do thorough study to determine the appropriate sum assured and a reasonable premium you are comfortable to pay. You could also take the help of a term plan calculator. To get the most out of your term plan, thoroughly review it and purchase additional coverage if needed. Do not always accept the first plan that comes your way. Make an informed decision after conducting thorough research.
- Not completing the proposal form yourself: Insurance companies provide you with term insurance coverage based on the information you submit in the proposal form. As a result, you must fill out the form yourself rather than relying on your agent/financial advisor or a close family member to do so. Also, ensure that all details are accurately and completely provided in the proposal form. If the insurer discovers that you have purposefully hidden or made inaccurate disclosures, your claim may be denied. The best and only method to avert this problem is to fill out the proposal form yourself and supply all facts to the “best of your knowledge”.
- Choosing the insurer with the highest claim settlement ratio: The claim settlement ratio is a prominent measure that most insurers display on their websites. However, it has several drawbacks. For starters, it provides no inkling into the quality of the claim experience your family will receive. Secondly, it is calculated for all insurance plans the company offers. As a result, it may not accurately reflect the insurer’s settlement ratio for term insurance claims. It is also possible that the insurer is effectively maintaining a high ratio by resolving low-ticket claims rather than high-ticket claims, such as term insurance. So, don’t select your insurer simply based on the claim settlement ratio. A high claim settlement ratio will not increase your family’s chances of having the claim resolved, and a low ratio will not decrease them.
- Not researching the plan: The coverage, terms and conditions, and everything else must be thoroughly reviewed in order to have a fair understanding of what you are acquiring and how the policy process works. Do some research before purchasing a term plan in India, and read the plan thoroughly to get the most out of it.
At last,
Another grave mistake people make is delaying the process of purchasing the term plan. Remember, the earlier you acquire, the more coverage you get for a lower rate. You acquire term insurance to ensure your family’s long-term financial security. So, to avoid hassles during the claim process, avoid making these blunders.
