Important factors to be considered before you select a Term Insurance Policy:
Benjamin Franklin once rightly said that “In this world, nothing can be said to be certain, except death & taxes”. So, you need to understand that your demise may leave your family in a financial jeopardy. Being the breadwinner, you are responsible for giving financial security to your dependants and ensuring that they continue with the same living standards. Term Insurance is a very convenient and flexible tool to provide income replacement to the surviving members of the family in case of death of the earning member. In consideration of nominal premium amount, it provides a death benefit in the form of guaranteed Sum Assured to the dependants upon the demise of the policyholder during the policy tenure. The survivors may receive the death benefit as a lump sum or in the form of monthly income continued over a fixed period.
The term insurance plans offered by various life insurance companies have similar premium amounts and marginal differences in the policy framework. It may at times make your selection process a bit tricky. Selecting an appropriate term insurance is a crucial step towards securing financial future of your family members. A variety of factors concerning both the insurance company and the term plan features like affordability, period of coverage, the amount of risk cover, etc. needs to be considered before arriving at the term insurance plan of your choice.
This article primarily deals with an explanation of factors affecting the selection of term insurance plan and in the end, it suggests five term plans that you may consider to buy based on these factors.
Firstly, let me take you through the factors that you need to consider while selecting a term plan:
1. Affordable Premium
The premium amount is the consideration you need to pay to get the risk cover from the insurer. The premium outgo depends on upon your income, age, gender, tenure of coverage, amount of risk cover desired, additions of riders to the basic plan, lifestyle habits, occupation, etc. Remember as you age you become less insurable i.e. the same risk cover would be available at a higher premium. You may choose a term plan wherein you can pay an affordable premium, and you get the required risk cover.
2. Sum Assured
The general thumb rule followed here is that the risk coverage can be 10-12 times your annual income. Moreover, over-insurance is as bad as under insurance. Keeping this in mind, you may calculate the sum assured scientifically considering any of the three approaches i.e. Human Life Value, Need Analysis, or Income Replacement Value. Other factors can be the number of dependents, whether the family members have any other source of income, the age of dependents, any upcoming crucial events that would entail massive fund outflow like children’s higher education or wedding, overall health of the dependents, outstanding liabilities like home loan/car loan, etc. You should bear in mind that the higher the sum assured; the higher would be the amount of premium. Accordingly, you may arrive at risk cover that addresses all the above issues.
3. Availability of Riders
If plain vanilla term plans do not serve your purpose, then you can get riders added to the basic plan for comprehensive risk coverage. Insurers provide riders like Accident Death Benefit, Critical Illness Rider, Waiver of Premium Rider, Life Stage Benefit, etc.
For example- If you happen to travel a lot, then you may consider buying Accidental Death Benefit Rider as an add-on to the basic term insurance plan. You may avail Riders by payment of an additional premium over and above the premium paid to secure the death benefit. You may go for a term plan which offers you the rider as per your requirements.
4. Policy Tenure
Choosing the right tenure of a term plan is as crucial as determining the sum assured. Ideally, the term plan should continue up to the age till which you decide to keep working. Earlier, people used to hang their boots by the age of 60 but nowadays the working age has extended beyond the usual retirement age. So, to decide the tenure for which you need a term plan just subtract your present age from the assumed retirement age.
5. Claim Settlement Ratio
This ratio also influences your decision about the right term plan. Claim Settlement ratio tells you about the total number of death claims settled by a life insurance company as compared to a total number of death claims received in a particular financial year. Higher is the Claim Settlement ratio; the higher is your family’s prospects to get the claim in case of your death. Choose an insurer whose Claim Settlement ratio is at least 90% & above which means that the insurer paid off 90 out of 100 death claims received.
Further to the above ratio, you can also look into grievance ratio, i.e. no of complaints for every 10000 policies, as well as the speed at which the claims are settled.
6. Solvency Ratio
Imagine a situation where the life insurer is unable to settle the death claims due to insolvency or lack of funds! It would be somewhat like a nightmare for you if that happen to be your life insurer. Before entering into long-term risk cover agreement with any life insurance company, you need to ensure that it has enough capability or solvency to honour your claim. The Solvency Ratio indicates the size of the insurer’s total assets in comparison to the liabilities or risk assumed by it. Thus, a higher solvency ratio implies that the liabilities are backed by assets more than the mandatory limit of 1.50 as set by the IRDA and is a positive sign for you as a policyholder as this gives you a sense of comfort about your life insurer.
Also read: Term Insurance vs Endowment
Now let me take you through 5 term plans that may be considered based on the above factors.
The following table provides the quotes that are for on-line term insurance plans having a basic Sum Assured of 1 crore, regular premium payment term on an annual basis for a non-smoker male aged 30 years.
Term Insurance is a tool to take care of the financial loss which results due to the certain risk i.e. death. Therefore buy a term Insurance even before you think of your investments. Keep all the factors mentioned above in mind and read the policy wordings carefully before making a final purchase decision. In case you feel that you ended up with the wrong product then do keep in mind that you have free look period of 15 days to exit the policy.
Also read: Types of life insurance policies in India