The well-being of the family is the first thought that comes to the mind when someone decides to plan for their future. Further, your monetary requirements increase as your family grows, and therefore, it becomes important to have a strong financial plan. This is where term insurance comes in. A term insurance plan is the simplest form of insurance. The sole aim of this plan is to provide financial security to your family even in your absence.
However, buying term insurance and buying the right term insurance are two different things. Many people buy term insurance without considering all its vital aspects. Are you also guilty of the same? Given how important a term insurance is, it is essential that you exercise caution and wisdom while buying an insurance plan. How? By avoiding falling into the following three traps:
- Not Buying Enough Life Cover
An insurance cover which falls short of surviving dependents’ actual need is no cover at all. It will not protect them from the financial lurch in the unfortunate event of your demise. By thumb rule, life cover should be about 15-20 times of your annual income. If you suffer from a life threatening medical condition, then the cover needs to be higher due to the high risk attached to your life expectancy. Further, number of dependents, earning members, current expenses, inflation and expected outflows in future would be important points to look at while arriving at the coverage mount.
Let’s take an example. Deep is a healthy, 32 year married man with one child aged 2 years. He also has elderly parents to take care. His wife is a homemaker. His annual income and expenses are around Rs10 lakhs and Rs 5 lakhs respectively. He also has an outstanding loan amount of Rs 5 lakhs. If he plans to buy a term insurance plan, he should seek the coverage amount of at least Rs1.65 crores to secure his family’s future.
(Source: ICICI Prudential)
- Not Buying for the Right Duration
Let’s say, you are 30 years old and buy a term plan for 10 years tenure. Your existing policy will expire when you reach 40 years of age when you still have dependents and liabilities to take care of. So, if you go to buy a fresh policy at this time, you will need to pay high premium due to an increase in your age. At the age of 30, it makes more sense to buy a 25 or 30 year term plan.
- Selecting the cheapest policy
It is not always the smartest idea to buy a term plan which offers lowest premiums. What is more important is that whether the term plan you are buying serves your purpose or not. You may buy the cheapest term plan from ‘X’ insurance company, but it may not have a good claim settlement ratio. What’s the sense of buying a term plan which has a lesser probability of securing your family’s future? So, while buying a term plan, you must also consider other factors like the market reputation of the Insurer, ease of procedures for claim settlement and whether they provide special riders and additional cover. Extra cover and special riders come with an extra premium, but do not hesitate if they suit your requirement.
Buying term insurance is a vital part of your wealth and financial planning; however, buying the right one is more important to aid your goal and expectations. This is why avoid the above mentioned traps to sit back and enjoy peace of mind.