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term insurance

11 Commandments for Term insurance

Off Lately there has been a major push by life insurance companies for term insurance.

Term insurance is considered to be pure life insurance covers. It’s the cheapest insurance cover available.

It’s a sought of the contract were the insured agreed to pay a fixed amount for a pre-decided period for a fixed risk cover. Like Premium 9500 Rs for 1 crore risk cover for 40 years.

The family of the deceased shall be compensated in case something goes wrong. In case nothing goes wrong the insured shall not be eligible for anything (Few Plans offer a return of Premium). Though it sounds like simple car insurance wherein you would be paid the claim in case of accident only but there are other important differences too: –

  • It’s a long-term contract
  • You cannot change your insurer
  • The claim is only paid in death, not on accident.

The companies are pushing pure insurance for numerous reasons. Major of them being an easy entry into customers’ financial domain. Definitely a low premium and high promised return is a good investment.

The sales pitch of the agent or relationship manager is simple. A 40year individual needs to pay 18000 for 1 crore risk cover for 35 years. The individual needs to shell 6.30 Lacs over the next 35 years. Considering the life expectancy of 67 years and various other life stage diseases the probability of individuals reaching   75 age is very less.

So by paying just 6.30 Lac’s individuals have high chances of getting 1.00 cr. The preposition is interesting and worth noticing and investing.

No doubt term insurance is the most important instrument in an individual’s financial portfolio. It gives a huge cover at a very little cost.  

Today 24 insurance companies are fighting for your insurance policy. But before signing off and handing over that cheque, here are few crucial points which you need to consider and have their answers before you say go ahead.

1) Start term insurance as soon as you start Earning

The day you start earning, you should have term insurance.

The basic premise of term insurance is to have a financial flow to your family in case something goes wrong to you. The premium is much less in the early years and increases as the age increases.

There are chances that you might develop some medical condition, which would act as a deterrent in having the policy. 

2) Don’t go for the whole life term insurance policy

The purpose of term insurance is to substitute the income which you are earning.

you should opt for Term insurance till your retirement only, by that time your family member would be financially dependent.

Insurance companies are providing risk cover till 100 years, don’t fall in trap as that would be increasing your yearly premium only.

3) Go for plain term insurance with no riders attached

plain term insurance

when you are opting for Term insurance just go for plain insurance.

There are various variants available like Return of Premium / Increasing claim benefit / critical illness and other riders etc. These all would simply make the premium heavier which you need to service for the next 30-35 years.

Return of premium or increasing claim amount would double or triple your premium.

The same can be easily invested in other avenues to have much more flexibility and return. Riders like critical illness etc. are not required as there is a limit to what you can opt. Also, it’s better to opt for standalone medical insurance.

4) Don’t take single or limited period

Opting for single or limited period turns out to be lucrative for 2 reasons

  • Lesser premium needs to be paid as compared to the full period payment
  • Chances of Lapsation reduces.

 If you do your mathematics you would found that it turns out to be more expensive if you opt for a single or limited period.

Its true lapsation of policies is rising in India resulting in nullifying the benefits of all your past investment.

The same can be easily contested by:-

a) Make the investment date adjusted to any rememberable date like a birthday

b) Have ECS facility opted for premium payments

Make sure the Agent relationship manager meets you every 6 months.

Mention the same on your reminder calendar at the start of the year.

5) Declare all your and family medical history

declare all investments

 Almost all insurance companies are asking for physical or tele-medicals (based on age and risk cover opted).

The idea is simple that insurance companies don’t want to take a risky life in their portfolio. It’s advisable that an individual should declare all his and his family’s health history while signing the application.

A major reason for the rejection of the claim is hiding health history. Declaring health history at the beginning might call for some extra premium but it would take care of all the hassle which might arise when the individual would not be there.  

6) Declare all your life insurance investment

The insurer provides risk cover based on the financials and earning of the individuals.

While signing for insurance individuals should declare all the previous investment and their status. Make sure the agent mentions the same in the application form.

Sometimes just to avoid medicals agents try to avoid filling this space. This can create a problem later.

7) Take full cover – don’t compromise

When signing term insurance make sure you take full coverage based on your income/expenditure and lifestyle.

Don’t go for part insurance. If required increase the insurance after assessing your income maybe after 10 years.

8) Don’t take multiple policies

Ideally a single or at the most 2 policies are enough to cover your insurance requirement.

Don’t venture into multiple policies. Not only it would be expensive to service and pay it would be difficult to manage.

Imagine a scenario wherein the claimant has to visit 10 different offices with the same set of papers to have the claim registered and payment released.

9) Check claim settlement of the company

claim settlement of company

You need to verify the claim settlement ration and the average time for claim settlement.

Companies like HDFC / MAX / TATA claims to have settlement ration of 98% plus are good for term insurance.

whereas companies like Shriram Life having settlement ration of just 67% raises doubt.

Make sure it should be smooth and hassle-free as the nominee who would be having little knowledge and not in the right frame of mind.

10) Check / read policy papers – have written communication  

READ COMPLETE POLICY PAPER

When you get the policy documents its important to go through in detail.

Clear doubts in case any, also make sure everything is written whatever has been promised.

It’s advisable to have an email from an official account mentioning all terms and conditions. The investment in term insurance is not for a short period and it’s always safe to be on the safe side.

There is a possibility that the agent/relationship manager is no more with the company but that should not make your investment redundant. 

11) Communicate the same to your family member :  

Make sure your family members are aware of the investment in a term plan.

It’s always advisable to keep a photocopy of the same with your Spouse. You can have the same in e-format and have the same registered with your broker.

Conclusion

Term insurance is the most important part of a personal portfolio. It should be taken with utmost care as the need would be when you would not be there. You should not only look for the insurance premiums but also all other factors.

Before building your portfolio, first, take term insurance.

Must Read – 10 habit of the highly successful investor

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