Saturday, July 2, 2016

7 Mistakes You Shouldn’t Make When Purchasing Term Insurance in India

Buying a term insurance and buying the right term insurance plan, both are different things. In the scramble to get a low-cost policy, people often forget to read the fine print and end up making mistakes that give inconvenience to their loved ones in the future. Given that, how useful a term insurance policy is, you can’t afford to make a mistake. It is important to exercise caution and wisdom while buying a policy. How? By avoiding the following mistakes:
Term Insurance
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  1. Not disclosing important information on the policy application form: The insurer has rights to reject a claim if it finds that the policyholder did not mention vital points in the insurance proposal form. If your close relative has suffered from any chronic ailment, mention it in the form at the time of buying the policy. Similarly, if you are a heavy smoker, don’t categorize yourself as a casual smoker. It is a suppression of a fact. It is important to disclose your facts otherwise your dependents may face a tough time in getting the claim amount. So even if it means paying a few bucks extra in premium or having to undergo some medical tests, it will be worth it because the purpose for which you are buying a term plan — to secure your family’s future— is met. It is important to be honest when it comes to filling up the form, so that the claim is not rejected and your family is completely secured.
  2. Choosing wrong insurance cover: Usually, most of the people choose a cover either of Rs 50 lakh or Rs 1 crore without considering their present liabilities and income, which defeats the entire purpose of buying the insurance. A life cover of Rs 50 lakh may seem to be sufficient today, but due to the inflation impact, its value may fall in 10 years. An insurance cover should be 12 – 15 times of your annual income and should be able to replace your income after your death. Therefore, while buying a term insurance cover, you should always consider your income, expenses and liabilities and the impact of inflation.
  3. Not reviewing the policy cover at key stages: Most of the people buy a term insurance cover but forget to review it periodically. Purchasing a term plan is not a once in a lifetime event. While you may have bought a term insurance years ago based on your different needs at that time, it is important to review it periodically to get the maximum benefit. There are many life-changing events, like when you get married, have a child, buy a house or when there is an increase in income, etc.; when your term plan cover needs to be reviewed to ensure it is in sync with your current state. Similarly, increase your term insurance cover if you take new loans.
  4. Not setting up the premium reminder: If you miss the due date of the premium as well as the grace period, your policy will lapse and your family will lose financial protection. In case you want to revive it, the insurer may ask you to undergo a medical test, and the premium may increase if you have had a health issue in the given time frame. To avoid this, you should give an ECS mandate to your bank for making payment. In this way, you can ensure your term insurance cover doesn’t get expired just because you didn’t pay the premium on time.
  5. Not choosing a comprehensive cover: A term insurance is an answer to a horrifying question, “How my family will survive if I die tomorrow?” But what if you are alive but unable to work due to the critical ailment or disability? On top of that, you have to bear hefty medical expenses also. How will you ensure the financial stability of your family? In this case, as you are still alive, a plain term policy will be of no use. To avoid this situation, one should go for a comprehensive term insurance, which offers 360-degree coverage against critical ailment and disability. The insurer will pay a tax-free lump-sum if you’re diagnosed with a critical illness. The amount can be used to pay off your hospital bills, mortgages or debts. Similarly, in the case of permanent disability due to an accident, all future premiums are waived, but the policy continues to offer coverage. You can also buy an accidental death benefit rider to ensure your family receives double the sum assured in case of your death due to an accident
  6. Looking at a price only: If you go for the cheapest term plans and avoid critical parameters like claims settlement ratio and solvency ratio, your family will be at risk. Usually, companies with cheap term plans don’t have a good claims settlement ratio and therefore, your family may face difficulty in getting death benefits after your death. So don’t choose a term insurance just because it has low premium rates. You should consider claim settlement ratio of the company, which shows how many claims the companies is honoring every year, before making a final decision.  Similarly, solvency ratio shows the financial condition of the company. A high solvency ratio means that the company is in a good financial state.
  7. Postponing the idea of buying a term insurance: It is the human nature of postponing things by making excuses. Similarly, we procrastinate the idea of buying a term insurance; however, by delaying your insurance buying process, you are putting your family’s future at risk. Also, premiums rise with an increase in age. For instance, a 26-year old male needs to pay Rs 7,222/annum to get Rs 1 crore coverage under ICICI Pru iProtect Smart Plan. However, if he delays it by even two years, he would need to buy Rs 7,980/annum. So the best time to buy a term insurance is NOW!  Buy before the birthday because that’s when the premiums will increase.
Now that you know some of the common mistakes that are made when taking out term insurance, you can avoid them. Also, remember to get your insurance from a reputed and trustworthy insurance company.

Take your time to browse through a term plans online. Then narrow down your options, and select a policy that gives you the most value. In this way, you can protect yourself and your family from unforeseen troubles in the future.

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