How To Choose A Term Life Insurance Plan?

Nobody can predict what the future has for them, but they can certainly prepare themselves for it. This is why having a term insurance plan is essential. With a term insurance plan, you can have the peace of mind that your family will be taken care of financially if you are no longer around to provide for them. It offers a level of protection that is necessary in today's fast-paced world, where accidents, illnesses, and unexpected events can happen at any time.

However, choosing the right term life insurance plan can be a daunting task. With so many options to choose from and industry jargon to understand, you can easily feel overwhelmed.

But worry not! In this article, we will break down the key factors to consider when choosing a term life insurance plan, so you can make an informed decision. So, let’s dive right in!
 

What Is Term Insurance?
When it comes to protecting your family's financial future, a term insurance plan can provide a simple yet effective solution. With its straightforward nature, a term insurance plan offers a clear understanding of what your family will receive in the event of your untimely passing - a ‘sum assured’ - which can be a lifeline for your family. It will help maintain their standard of living and pursue their dreams, by serving as an income replacement in your absence.

However, you should be aware that term insurance is a pure risk cover. This means that if you survive the policy duration, it will not pay any benefits to you.
 

How to Choose A Term Life Insurance Plan?
Here are the factors to consider before choosing a term life insurance plan –

1️⃣ Determine the cover amount
If you have decided to invest in term insurance, the most crucial aspect is to ensure that you buy a policy with the right sum assured. When you buy term insurance, you are essentially protecting your family members who are financially dependent on you. You prevent them from facing any financial disruption after you pass away. If the sum assured you choose proves to be inadequate in the future, your loved ones may face financial hassles and stress and you won’t be able to take care of them any more.

One way to determine the appropriate sum assured is by evaluating the difference between what you will leave behind for them and the amount they would need to maintain their lifestyle and meet their future goals.

To calculate this gap, you need to assess both the amount you owe and the amount you own. The amount you owe includes –

• Regular Living Expenses: Your family’s basic needs like groceries, rent, utility bills, and other monthly expenses.
• Major Expenses: Any significant future expenses like your child’s higher education, wedding, etc.
• Outstanding Liabilities: Any loans or debts that you have taken.

On the other hand, the amount you own comprises your existing funds like savings, fixed deposits, and any other assets that you have. 

After calculating the difference, you will arrive at the gap representing the amount of term life insurance coverage needed to ensure that your family's financial needs are adequately covered. You will then need to subtract the amount of any life insurance coverage you already have from this calculated gap amount. The resulting number represents the term insurance coverage you need to buy.

2️⃣ Consider the impact of inflation
As you progress through life, your financial obligations will continue to grow. You may get married, have children, buy a house, or provide for your family's needs, and so on. It is, thus, essential to ensure that your term insurance coverage keeps pace with these growing responsibilities. To meet these increasing financial obligations you will need to upgrade your term insurance coverage several times throughout your life. 

Factor in inflation when determining the appropriate sum assured. The value of money changes over time, and the amount you need for your family's expenses today may not be enough in the future due to the impact of inflation. You can multiply the calculated cover amount by 2.5 to 3X to inflation-proof your cover.

Alternatively, you can choose the increasing cover option. With this option, your sum assured will gradually increase at specific intervals until it reaches a maximum limit. This feature ensures that your coverage aligns with inflation and growing needs.
 

 3️⃣ Choose the right policy duration
The next step is selecting the policy duration. For this, you should consider three main factors -

• Your earnings
• Your savings
• Your future expenses

You should then estimate the age by which you will have fulfilled all of your financial obligations and created enough wealth for the rest of your life. In essence, you should estimate the age at which you plan to retire.

This is the age until which you'll need a term insurance policy. Therefore, you can purchase a term insurance plan that extends until your retirement age - with a buffer period of 5 years, if needed.
 

4️⃣ Customise the premium payment term
When you purchase a term insurance policy, you are usually required to pay premiums throughout the policy duration. However, if you want to finish paying the premiums early, you can choose from these options -

• Limited pay option
  You can complete your premium payments in a shorter period of time, such as 5, 10, or 15 years, in bigger instalments. And continue to enjoy policy benefits until the end of the policy term.
   
• Single-pay option
  You pay the entire premium in one shot when you buy the policy, and enjoy its benefits until the end of the policy term. It can be a suitable choice for those who have a lump sum of money and want to invest it for their family's future financial security.

For example, Rita and Sonal are both 30 years old and want to purchase say the Max Life Smart Secure Plus Term Plan for 30 years with a sum assured of Rs. 1 crore.

• Rita chooses the limited pay option with a 10-year premium payment term. She will have to pay an annual premium of Rs. 21,674 for the next 10 years. She will continue to be covered for the entire policy term of 30 years.
   
• Sonal chooses the single-pay option. She will have to pay a one-time premium of Rs. Rs. 1,94,170 at the time of purchasing the policy. After that, she won't have to pay any more premiums and will continue to be covered for the entire policy term of 30 years.

Note: The above premiums are taken on 10.03.2023
 

5️⃣ Customise the premium payment frequency
You can also choose how often you want to make premium payments, whether it’s yearly, half-yearly, quarterly, or monthly, depending on your finances and convenience. Regardless of the premium payment frequency you choose, you should ensure that you have set up the “auto-debit” or “standing instructions” on your bank account to ensure that the premiums are paid on time. This will help prevent your policy from lapsing due to any missed premiums.
 

 6️⃣ Opt for the Married Women’s Property Act, if you are a married male
Your family may face two significant problems if you pass away during the policy duration -

• If you have taken any loans, they will still be considered as liabilities to be repaid. When your family receives the term insurance claim amount, it will be first used to pay off the outstanding loan amount, and only the remaining amount is given to them.
   
• Your assets and liabilities may be passed on to your legal heirs as per succession laws. This can lead to legal battles and family members swooping in to get a hold of the term insurance claim amount.

To avoid such scenarios, if you are a married male, you can opt to buy your term insurance policy under the Married Women's Property (MWP) Act. By signing an additional addendum, you can ensure that the claim amount directly goes to your wife, bypassing any other family members or creditors. This welfare act grants married women specific rights, ensuring that they can prioritise their needs and use the claim amount for their benefit without any legal hindrances.
 

 7️⃣ Pick the right claim payout option
You can also choose how the claim amount will be paid out to your family members. You should consider your family's needs and how financially well-versed they are while selecting the payout option.
Choosing a suitable payout option can ensure that your family can get the financial support they need, while also ensuring that they do not get overwhelmed by the sudden influx of a huge amount of money.

Here are the payout options you can choose from -

• Lump-sum payout option
  Your family will receive the entire claim amount as a lump sum in one go. This option is especially useful if you have any unpaid debts or liabilities to be settled.
   
• Monthly income payout option
  Your family will receive the claim amount in monthly instalments for a predetermined period. This option is ideal if you wish to create an income replacement for your family's regular expenses.
   
• Lump-sum with monthly income payout option
  A combo of the two aforementioned options. The insurer will pay a portion of the claim as a lump sum, while the remaining amount will be paid out as monthly instalments for a specified period. This option is best suited if your nominee is not financially well-versed.
   

 8️⃣ Pick any riders you need
Riders are add-ons that you can choose to purchase along with your base term plan. They can be bought easily with no additional paperwork.
Riders expand the coverage of your base policy by offering an additional payout in the event of a specific occurrence. With riders, you can tailor your policy to meet your financial needs and provide extra protection for your loved ones.

Here are some riders commonly available with term life insurance plans  –

• Critical Illness Rider
• Accidental Death Benefit Rider
• Accidental Disability Rider
• Waiver of Premium due to Critical Illness Rider
• Waiver of Premium due to Accidental Disability Rider
• Surgical Care Rider
• Hospital Care Rider

Note: The above list is indicative. The availability of riders may vary depending on the insurance provider and the policy that you select. It is important to thoroughly review the policy documentation to have a better understanding of the available options.
 

 9️⃣ Conduct proper research and comparison
Before purchasing term insurance, it is necessary to conduct thorough research and comparison of the insurance company and the product. This involves comparing the different policy options, including their benefits, features, and drawbacks. You should also evaluate the customer service provided by the insurer, as well as their past performance.

By doing this, you can gain a better understanding of what each policy offers, which will ultimately help you find the right policy. You can also gauge how reliable your insurer is. This can help you make an informed decision about which policy and insurer to choose - so your family doesn’t have to face any hassles in the future when they’re already going through so much.
 

To Conclude,
Remember that choosing the right term life insurance plan is a critical financial decision that you take for your loved ones. Each person’s needs are different. There is a term life insurance plan out there for you. We recommend that you start researching and comparing your options today to get the protection your family deserves.