The main purpose of having a term insurance plan is that it acts as an income replacement tool in the case of early death or severe disabilities or diseases. These disabilities or death may be natural or can be caused by disasters which disrupt your livelihood.
Now most of us knew this before opening this article. However, only a few know when and how to choose Term Insurance for themselves as insurance companies offer various products and features.
Before getting into term insurance features and variants, there are 3 imp factors which dictate your need for an insurance policy and the level of protection needed. These 3 factors are:
- Age : This is the foundation factor in life insurance. The younger you are, the less costly it is for you and the insurance company. See, if you are young, then probably the insurer does not have to payout in the near future. Hence, they charge you a lesser premium.
- Dependents: Financial dependents on you is the next important factor. In case of your early demise, your financial dependents like your wife, kids become vulnerable. If you are the sole breadwinner in the family, then having a life insurance plan guarantees the survival of your dependents.
- Job Type : Some jobs are riskier than others. For example, if you are a pilot then each time you fly you risk your life. It becomes increasingly important for you to have a term insurance policy.
Some of you might wonder why Life insurance is called Term Insurance. So actually, Term insurance is used because the duration of the insurance cover is a ‘FIXED TERM’. Life insurance can be a Term Life Insurance or Whole Life Insurance. Term Life insurance is more popular.
Now, let’s get into choosing the Best Life Insurance Policy that suits your needs.
Buy Life Insurance Sooner rather than Later
In our view, everyone needs Life Insurance and if you’re the sole breadwinner then it becomes crucial. It can offset your liabilities and the reminder can be used to replace income streams.
So, after establishing that everyone needs one. We get into when you should buy it.
Buying it early rather than later in your life has 2 benefits.
- The Total Cost (including all premiums paid) will be lower as compared to buying it later in life.
- You will get a longer cover period.
Here is an Illustration to help you understand:
In the above table it is clear that you DO NOT benefit from delaying your decision of buying a life insurance policy. The overall cost goes up as the premiums are higher at later years in life.
Moreover, if you develop any health condition then the premiums skyrocket.
The Bottomline – You are better off if you purchase Life Insurance Policy in your early years.
Monthly or Half-Yearly/Yearly Premium Payouts. Which is better.
The payment frequency is an important feature to consider. Because, if you are not able to service the premium payments then your policy gets forfeited. And a forfeited policy won’t do any good.
Hence, you should choose a payment frequency that suits you and more importantly your cashflow.
Monthly payout : If you are one of those who are disciplined when it comes to money. And you won’t forget any monthly payment, then this can be the right choice.
PRO – you are not blocking a huge amount of money.
CON – you have to remember to pay every month.
Half-Yearly/Yearly payouts : If you have some extra cash on the side and do not mind a balloon (one-time) payment, then this is the one for you.
PRO – you pay once/twice a year and it’s done.
CON – you block a huge amount of money.
Pro-Tip: If you have surplus cash on you then paying an annual premium will be better as some of the insurers give a discount when you choose Yearly/ Annual premium payments.
Note: If by chance you forget to pay premiums on time, you get a grace period which is generally 15 days on annual/ half-yearly payments and lesser for monthly payments.
If you do not pay it in the grace period, then your lapses. If you want to revive a lapsed policy, then you will have to pay interest on late payments. But The insurance company can refuse to revive your policy if they wish to do so.
So Many Insurance Policy Types – Which one you should go for.
Insurance Companies have broadened their products like never before. Some say that this can be positive for insurance buyers.
However, we say that this has become counterproductive over the years. Insurance buyers like you can get rattled by the sheer number of choices and might end-up delaying the entire thing.
Here is a small reflection of Term Insurance Policy Types in India.
- Term Plan – pure risk cover for a fixed time period or lifespan.
- Unit Linked Insurance Plan (ULIP) – Insurance Policy + Investment in one.
- Endowment Plan – Insurance Policy + Savings.
- Money Back Insurance Policy – Periodic Return + Insurance Policy.
- Whole Life – Insurance Policy for your entire life.
- Retirement Plan – Insurance policy + Retirement plan
We always suggest that you should only go for a ‘plain vanilla’ Term Life Insurance Policy.
The reason we say this is that you should not mix investments, savings with Life insurance plans. Traditionally, these were different financial decisions and you must keep them separated.
Do not opt for ULIP, Endowment, Money Back Insurance Policies.
Your investments have to give you returns and not your insurance policy.
When it comes to the Whole life plan, the general life expectancy in India is a little less than 70 years. You really do not need this one, as if you do take it. Then you will be paying higher premiums for no good reason.
Your insurance policy should only provide you 1 benefit, that is Life Cover. Only go for pure term life insurance.
Choose the Correct Term
Getting the correct term is as important as getting the best life insurance policy. Basically, you must ensure that your new life insurance policy is not too short nor too long.
If you get an insurance policy that is too short, say for 15-20 years, then it won’t be beneficial. Whereas if you get a policy that lasts for 50 years, then you will be paying extra premium.
Ideally, the insurance policy should last till 65-70 years of your age. As mentioned above, the average life expectancy is 70 years. Another reason is that typically most people pay-off their liabilities by this age.
Insurance companies offer policies that last till 99 years or even the whole lifespan. But we do not suggest these policy terms.
Even if you are too conservative in your thinking and are a cynic, then also a policy that lasts till 70 years of your age should do the trick. Don’t overpay by choosing a longer time-period policy.
Must have Policy Riders
- Accidental Death Benefit Rider (ADB) – This rider is useful as in case of death by accident, the rider sum insured also gets added to the policy cover.
- Accident Death and Disability Benefit Rider (ADDB) – This rider serves that same purpose as Accidental Death Benefit (ADB), but also covers any disability caused. Getting disability cover is essential as if by chance you suffer serious disability, you can claim an insured amount.
If this rider is not opted and you face disability, then your claim will get rejected. Hence this is an important one to opt for.
- Waiver of Premium Rider (WOP) – WOP rider ensure that in case of disability, you do not have to continue paying preimums. When someone suffers from accidental disability, it becomes hard to continue paying premiums. The person might struggle to earn all-together, how can he/she pay premiums. Hence, having this rider is important.
- Critical Illness rider (CI) – This rider provides additional cover in case the policyholder is diagnosed with critical illness. As you may know, that being critically ill is an event which is not covered under traditional life insurance policies.
Do not avoid medical tests. Some insurance companies make their potential policyholder go through medical tests before issuing a policy. However, some of the insurers do not insist on medical tests.
Not going through medical tests before buying a policy can be costlier. Assuming that you are healthy and proving it are two different things. If you go through medical tests, then you can prove that you’re fit and fine.
After reading this post, it will be safe to say that a vast variety of insurance products are available in the market. Which has made assessing insurance policies a difficult task.
Here we have tried to layout information which is simple and easily applicable. But still, factors like your age, job and dependents dictate the level of coverage you need.
You must remember that after buying a policy, you should review your policy at least every year and whenever your family situation changes. Like if you have a baby, then you should increase your cover.
Getting the opinion of a financial advisor when you are buying a policy is recommended as it will help you to cut the clutter.