The importance of a life insurance policy is unparalleled. It has been stressed time over again that life insurance is one of the critical pillars of financial planning. Ignoring these age-old tested methods can often bring inconvenience to you, as well as your family in your absence. Hence, it is important to not overlook buying life insurance plans early on in life.
But when it comes to buying life insurance, there are myriad insurance policies to choose from. Term insurance plans are one among them. While there are various insurance plans, term policies are pure insurance products. They compensate the dependents of the policyholder only in the event of the demise of the insured. Thus, regardless of the funds accumulated for retirement and to support your family, a term insurance plan comes in handy in your absence.
The importance of a term insurance plan is even more if you are the sole breadwinner. In the situations where your family has no financial safety net, term insurance plans can provide the required financial support.
Now that you know the meaning of term insurance, here are some of the critical considerations to look at when choosing one:
- Determine how much coverage you need
When choosing a term insurance plan, you need to decide upon the coverage of your policy. For that, you need to consider your age, your financial responsibilities, your family’s future requirements, your lifestyle and regular expenses, the debt you own, and the rising costs (inflation).
In an ideal scenario, the coverage amount would differ based on age for your term insurance, meaning the younger you are, the higher should be its cover. For instance, if you are in the age group of 25 to 35, a coverage of 20 times your annual income will be sufficient. Similarly, if you are between 35 to 45, 15 times your annual income, and for the age group of 45 to 55, the coverage must be 10 times your annual income.
- Determine the policy tenure
After deciding upon the coverage of your term insurance plan, the next consideration is its policy tenure. This determination is based on age, when you retire and on your financial responsibilities.
When determining the right policy tenure based on age, the younger you are, the longer must be the policy tenure is the thumb rule. For instance, if you are in your 20s, a policy with a 40-year tenure is advisable. Similarly, in your 30s, 30-year policy tenure, for 40s, 20-year policy tenure, and so on. To ensure you have substantial policy coverage for a lower premium, the policy tenure can be adjusted accordingly. In this process, you can make use of a term insurance calculator.
In selecting the policy tenure based on when you retire, an essential consideration is whether you have a retirement plan in place. If yes, then a term policy can be purchased till you expect yourself to retire, and if not, for the longest possible tenure offered.
Depending on your financial responsibilities is another way to decide on the term insurance policy’s tenure. For example, if you have a home loan for the next 30 years, a term policy for at least this period will help your dependents manage the payment for these big-ticket purchases without breaking their bank.
- Selecting suitable options for payout
Insurance companies offer different options for a payout based on their terms. For instance, some insurance companies offer lumpsum payout or regular monthly payments, or a combination of both. When selecting your insurance policy, it is essential to make a note of it. Depending on how you wish your family to be supported, you can opt for a suitable alternative. Further, the premium also differs when you choose either alternative, and hence, a term insurance calculator can come in handy.
- Selecting the right insurance company
Lastly, selecting the right insurance company is also critical. The right insurance company will ensure timely payout for your dependents in a hassle-free manner. In this process, there are a few basic checks you can make. Checking the claim settlement ratio is one of them. It is this ratio that denotes the percentage of claims settled by the insurance company in comparison to the total claims received.
Next, is the solvency ratio which helps to understand if the insurer is able to meet its long-term liabilities. While buying, you need not calculate these complex ratios but look at the IRDAI publication for them.
Lastly, the reputation of the insurance company is also essential to know about the customer feedback and grievance redressal for making a smart choice.
With these pointers, selecting a suitable term insurance cover becomes a well thought process and a calculated decision instead of relying on family and friends for their advice.