Factors to Keep in Mind Before Buying a Term Insurance Plan

Posted by rina on March 2nd, 2017

The basic objective behind a term insurance policy is that it should substitute the financial loss that the death of a person creates for his family members. Thus by definition, a term insurance policy is crucial for a young man married with young children, whereas it might be less important for a man on the verge of retirement with a significant pool of savings and children well settled. There are ten important factors that one should look at before purchasing a term insurance policy

1. Level of sum insured: A broad rule of thumb is 15 times the annual income if one is less than 40 years of age, 10 times the annual income if one is between 40 and 45, and 5 times the annual income if one is 45 or more. If you have a significant housing loan, you should have that loan covered through an additional credit life insurance plan, where the insurance company would settle the loan outstanding with your bank if there is a death. Another approach is Sum Insured = (total loans outstanding+ amount required for children's education and wedding) + (average annual consumption related expenditure ) *10. One should also bear in mind that one's earning potential and expenses are likely to increase through the years, and that we have a high rate of inflation which will continuously erode value. Rs 50 lakhs today might look like a tidy sum, but twenty years later it might not be significant at all.

2. Duration of the policy: The younger you are, the longer should be the duration of the policy that you purchase, synchronizing it with retirement age or the age at which one's financial liabilities would most probably reduce. A rule of thumb that can be used is that the term of the policy should be equal to Desired Retirement age - Current age.

3. When should I buy: The best time to buy a term insurance plan is NOW. This is because term plans get more expensive as one gets older. The biggest risk is that one might contract certain diseases with time which makes entry into a Term Insurance Premium Calculator more complicated. The insurer might refuse to underwrite the risk or bump up the premiums if you have reported any medical condition. Future is uncertain while the financial liabilities are predictable, and leaving behind a set of crippling financial liabilities for one's dependents is irresponsible and avoidable.

4. Should I buy additional protection through Riders: Riders for an insurance policy are similar to the extra toppings on a pizza. A pure insurance policy pays out only on death. But there can be situations such as a critical illness or a severe accident which can completely eliminate one's earning power. Riders such as Critical Illness riders or Permanent Total Disability riders come to the rescue here. These riders ensure that the sum insured is paid out to the policyholder in case any of these unfortunate situations occur.

5. Who should I buy from: At the end of the day, an insurance contract is a contract of trust between the life insured and the insurance company You should buy your policy from someone who you feel will honor the contract the best at the time of the claim. You can have a look at the IRDA site for the claim

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