Family provides us with a sense of safety, connection, and unconditional love. It is a place of refuge, a source of support, and a foundation for personal growth. Therefore, it is essential to show your love and commitment to your family by taking care of them and being there for them whenever they need you. But, who will look after them - if something unfortunate happens to you? To ensure that your family is protected and secure even in the case of an eventuality, it is important to have a financial safety net in place. What can do that better than term insurance?
Term insurance gives you the confidence that you are providing your family with the financial stability they need, even in the worst of times. It is a tangible expression of your love for them, and the best way to ensure their security.
However, before you go ahead and make a purchase, it's important to do your research beforehand to ensure you get the best possible value for your money.
We've put together the ultimate guide to buying term life insurance - which explains the various nuances of term insurance - to help you make an informed decision.
First, What Is Term Life Insurance?
Term life insurance is an easy way to protect your family's financial future. The insurance company will pay your family a sum of money (technically known as the ‘sum assured’) if you pass away unexpectedly while the policy is active. With term insurance, your family can be secure in the knowledge that their financial future is taken care of even in the event of your untimely death. Essentially, it replaces your income so your family's financial needs are met without compromising their dreams.
One main disadvantage of term life insurance is that if you survive until the end of the policy period, you will not receive any benefits.
The Ultimate Guide To Buy Term Life Insurance
Here is a list of aspects you need to keep in mind before buying term life insurance -
1️. Sum Assured
To begin with, you need to decide on the sum assured. The sum assured should be chosen carefully to ensure that your family is adequately provided for in the event of any unforeseen circumstances. With this in mind, it is essential to select a sum assured that meets your family's needs today and in the future, no matter what may happen.
How do you calculate the sum assured?
?First, you need to calculate the gap between what you will leave behind and what your family actually needs. For that, you need to calculate -
- The amount you owe - short-term expenses, long-term financial goals, loans, etc.
- The amount you own - savings, FDs, investments, any existing life insurance covers etc.
This difference represents the financial gap you will need to fill with term insurance.
?To ensure your family is adequately protected over the long term, make sure you purchase a term insurance policy with a sum assured that can keep up with the increasing costs of inflation as well. To do this, factor in inflation of around 6-8% when you calculate the sum assured.
2️. Features & Customisation Options
Term insurance offers a wide range of features, benefits, and customization options. These features and customisations allow you to tailor your term insurance policy to meet your family's needs.
Here are a few common customisation options -
It is the period of time during which the insurance company provides you with term insurance coverage. Depending on your future plans and goals, you can buy a policy that will last up to the age of 60 years, 65 years, 70 years, or less too. Term insurance is also available on some insurance platforms up to the age of 99/100 years.
?Premium Payment Duration
You will be required to pay term insurance premiums for this period of time to keep your policy active. This is like paying rent for your apartment - you must make regular payments to remain in the place you call home. Depending on your preference, you may choose a shorter or longer premium payment duration. Term insurance offers three different premium payment terms -
- Regular Pay Option
The policy premiums must be paid until the end of the chosen policy period.
- Limited Pay Option
The premiums can be paid off early within a limited period of time. So, you can finish off your entire premium liability within a few years under this option.
- Single Pay Option
You need to make the premium payment only once at the time of policy purchase.
?Premium Payment Frequency
You have the option to pay your premiums either yearly, half-yearly, quarterly, or monthly. If you have the means to make large payments, you can choose the yearly payment option. If you are unable to do so, you can choose one of the other options. For instance, if you are a salaried employee, the monthly option may be suitable for you.
?Claim Payout Options
When purchasing term insurance, you can also choose how you want the claim amount to be given to your family - if you pass away during the policy period. Here are the three common claim payout options available with term insurance -
- Lump-Sum Payout Option
The claim amount will be paid in the form of a lump sum to your family in one go.
Example: Maya purchases a term insurance plan with a sum assured of Rs. 50 Lakhs. She has a home loan of Rs 25 lakhs as well as a car loan of Rs 10 lakhs. Her primary goal is to make sure the debt repayment doesn't fall on her family's shoulders. So, she opts for a lump-sum claim payout option.
If Maya passes away while the plan is active, the entire amount will be given to her nominee as a lump sum. Her nominee can use that money to settle the outstanding loans and use the remaining amount for the family’s other needs.
- Monthly Income Payout Option
The claim amount will be given to your family in monthly instalments over a specific period of time.
Example: Manish purchases a term insurance plan with a sum assured of Rs. 30 Lakhs. He doesn't have any loans or liabilities. His primary goal is to make sure that his family's short-term goals such as everyday expenses, EMIs, rent, utility bills, etc. are covered when he is not around. So, he opts for a monthly payout option.
If Manish passes away while the policy is active, the insurer will pay the claim amount in the form of monthly instalments to the nominee for a specific period of time. They can use the money to meet their monthly expenditures.
- Lump-sum + Monthly Income Payout Option
A portion of the claim amount will be paid as a lump sum. The remainder will be paid in instalments over a certain period of time. The lump sum will provide your nominee with immediate financial relief, while the monthly instalments will guarantee them a steady source of income for an extended period.
Example: Manav, 30, lives with his spouse. He purchases a term insurance plan with a sum assured of Rs. 1 Crore. He has a home loan of Rs 30 lakhs. He appoints his spouse as the nominee. He wants to ensure that his spouse does not bear the burden of debt and has enough income to cover her goals and expenses in his absence. So, he opts for a lump-sum with a monthly income payout. In this case, as per the policy terms and conditions, 50% claim will be paid as lump sum and remaining will be paid in monthly instalments.
If Manav passes away during the policy period -
- Rs. 50 lakhs will be paid to his nominee as a single lump sum payment. She can use the amount to pay off the outstanding loan.
- The remaining amount of Rs. 50 lakhs shall be divided into monthly instalments. She can use the monthly instalments to take care of her goals and needs.
Riders are optional add-ons that can be added to your base insurance policy at a certain extra cost to enhance your coverage. The riders available with term insurance vary across insurance companies. Some of the most common ones are:
- Critical Illness Rider
- Accidental Disability Rider
- Surgical Care Rider
- Accidental Death Benefit Rider
- Waiver of Premium due to Critical Illness Rider
- Hospital Care Rider
- Waiver of Premium due to Accidental Disability Rider
For example, if you have an Accidental Death Benefit rider, the insurer will provide an additional payout to your family if you pass away due to an accident.
4️. Increasing Cover
As you age, your responsibilities will continue to rise. To ensure your family is financially secure, you need to make sure your sum assured is in line with your ever-growing needs. You can accomplish this by opting for an increasing cover option.
Under this option, your sum assured will grow automatically until it reaches the maximum limit specified by the insurance company.
You can opt for the increasing cover feature if -
- You want to inflation-proof your term cover.
- You envision growing responsibilities like children’s education and weddings, your spouse’s hospital bills, etc.
- You are not eligible for sufficient term insurance coverage for your family.
5. Married Women's Property (MWP) Act
You may take loans (personal loans, home loans, vehicle loans, etc.) to achieve your financial goals. And, in case you pass away before repaying them, the term insurance claim amount your nominee will receive will first be used to settle them. Your nominee will receive the claim amount only after outstanding loans and liabilities have been paid off.
Not to mention other family members and relatives who can make a stake in the claim amount, based on succession laws.
The situation can be quite problematic, but there is a solution. If you’re married and male, you can buy your term plan under the Married Women's Property (MWP) Act by signing an extra addendum. Under the MWP Act, married women are entitled to specific rights, including their right to receive the term insurance claim amount first. So, the claim amount will reach your wife first, allowing her to efficiently manage the claim amount to meet the family’s needs.
6. Picking The Right Plan & Insurer
It is important to look for a plan that offers all the features and customisations you need. Additionally, make sure the plan is offered by an insurer with an excellent reputation and claim settlement track record. To ensure the best experience, choose an insurer that offers efficient customer service and has a positive history of handling claims.
To do this, you can go through the insurer’s online reviews as well as their social media handles and community forums. You can also talk to previous and current policyholders to understand the insurer’s claim settlement ability and customer support.
Armed with this knowledge, you can visit the insurer's website and confidently purchase the policy that has the appropriate features and customisation options suited to your needs.
7. Benefit Illustration
As soon as you enter all the required information and choose the customisation options online, you will receive a benefit illustration, which helps you understand your policy in greater depth.
The benefit illustration will provide a complete picture of the term insurance policy you are considering, including its tenure, premium payment duration, features, riders, surrender value, maturity benefit (if any), etc.
Your insurance company will either send you this document via email or let you download it from its website. It is important to go through the benefit illustration carefully, in order to understand the nuances of the policy and make an informed decision.
8. Application Process
When you fill out the application form, you will need to provide several details -
- Personal details: Occupation, income, education qualification, temporary and permanent address, etc.
- Lifestyle details: Smoking habits, alcohol consumption, hobbies, etc.
- Medical details: Your and your family’s medical history, surgeries or treatments you may have undergone, etc.
- Basic body measurements: Blood pressure, height, weight, etc.
- Other details: Nominee details, future travelling plans, etc.
This is just an indicative list. Insurers can ask you for other details as well.
9. Submission Of Documents
In order to support your application, the insurance company will ask you to submit certain documents. It is important to ensure that all the documents requested by the insurance company are provided properly and in a timely manner.
For proof of your age, you may need to submit your PAN Card, Aadhar Card, passport, voting card, etc. For proof of income, you may need to submit salary slips for the last 3 months, bank statements for the last six months, employer certificates, Income Tax Returns, Form 16, etc. And so on.
10. Be Aware Of The Terms And Conditions
Terms and conditions will enclose all the nitty-gritty details of the insurance policy. Ensure that you understand the same before you go ahead and make a purchase. By reading the terms and conditions carefully, you can be sure that you know exactly what you are committing to. As soon as you agree to them, you will be redirected to the payment gateway.
11. Premium Payment
The premium is the amount you pay to keep your coverage active. Several factors determine the premium amount, including your age, gender, lifestyle habits, cover amount, policy duration, features and customizations you choose, etc.
Once you complete the application process and submit all required documents, you will need to make your first premium payment. You will then be responsible for regular premium payments to keep your policy in force.
12. Medical Evaluation
Depending on your declarations in the proposal form, your medical history, and your family's medical history, you may also be required to undergo some medical tests like a blood test, a treadmill test (TMT), a drug test, an HIV test, and an electrocardiogram (ECG), etc.
13. Underwriting Process
Underwriters are professionals hired by insurance companies who evaluate your policy application based on your financial + medical status and also verify the documents you submit to the insurer. After this assessment, they determine the sum assured you're eligible to buy.
Furthermore, they will also examine the medical declaration you provide on the proposal form as well as your medical test results - to estimate the risk you pose to the insurance company.
14. Policy Approval Or Rejection
The decision to accept or reject your policy application is at your insurer's discretion. If approved, you will be issued the policy. However, if your profile is deemed too risky, the insurer has the right to deny your application or make a counteroffer with the possibility of loading - which would result in a higher premium. If you agree to the higher premium, you will be issued the policy.
15. Free Look Period
When the term insurance policy is issued, you will be given a 15-day free look period during which you can go through the policy document and review all its features, benefits, terms and conditions, limitations, exclusions, etc. This is an added advantage given to you, as the customer, to make sure that the policy gives you the coverage you require and that it meets your expectations.
You have ample time to check whether you’re getting what exactly you need before you commit to the policy. If you are not satisfied with the policy, you can cancel it during these 15 days. The insurer will refund the premium amount you’ve paid. Certain costs such as stamp duty, administration fees, etc. may be deducted from it.
We have reached the end and hope this article provides a comprehensive overview of the different aspects of buying term life insurance. To make sure your loved ones are taken care of, buying a term life insurance policy could be one of the most important decisions you make. Therefore, it is important to take the time to research and pick the right policy - one that provides the features and customisation options you need.