A term insurance policy is an important addition to the financial portfolio for financial security. However, buying the plan should not be a random decision. It is better to do some research, understand your needs and then buy the right coverage. In fact, there are some common mistakes which are better avoided when buying the term policy. Let’s understand what these mistakes are.
Mistakes to Avoid While Buying a Term Insurance Policy?
Some of the common mistakes to avoid while buying a term insurance policy are as follows -
1. Selection of inadequate coverage
A term insurance policy provides sufficient financial assistance to your family only if the coverage is optimal to cover their financial needs. As such, choosing a limited sum assured defeats the purpose of a term plan.
What should you do?
Assess your financial needs, income and expenses, existing assets and liabilities and other factors to determine the adequate sum assured of the policy. You can use online term insurance calculators which help estimate the optimal coverage that you need.
There is also a thumb rule which says that your coverage should be a minimum of 10 times your annual income1. This gives a fair idea but you can use other methods too for calculating the suitable sum assured.
2. Opting for a short-term plan
A term plan covers the risk of premature demise only if the insured passes away during the chosen policy tenure. On survival till the end of the tenure, usually, no benefit is paid under basic term plans (in return for premium plans, however, the premiums are refunded).
To enjoy optimal coverage, it is advisable to opt for the maximum possible tenure under the term plan. Choosing a short-term plan is a mistake.
What should you do?
Nowadays, term plans also come with the option of whole-life protection. Under such plans, coverage is extended till 99 or 100 years of age. You can choose such plans for long-term protection.
3. Failure to compare multiple policies
There are more than a dozen life insurance companies in the market and each offers one or more types of term insurance plans. To find the right policy, a comparison is recommended. Not comparing the available plans might lead you to buy a policy with limited coverage and at a higher premium.
What should you do?
Thanks to the online mode, comparing term insurance plans has become easier. Compare the available plans online on the basis of coverage offered vis-à-vis premium charged and then choose the most suitable policy.
4. Non-involvement of online plans:
Online term insurance plans are also available which help you buy the policy quicker and, in some cases, you can also save on the premium. So, consider online plans too when buying term insurance.
What should you do?
Opt for online term plans and enjoy coverage at the earliest. Moreover, online plans are easier to buy and can save time.
5. Submission of inaccurate information
While buying a term insurance policy, hiding or lying about important facts about yourself might lead to claim rejection in the future. The insurance company underwrites your proposal based on the information entered in the proposal form. Incorrect or inaccurate information is not recommended.
What should you do?
Disclose all important details about yourself in the proposal form, even if it means that you might have to pay an additional premium or undergo a health check-up before buying the policy. This would help in avoiding future claim rejections. For instance, if you smoke or drink alcohol, inform the insurance company of the same.
Life Events for Which You Should Consider Reviewing Your Term Insurance Coverage
Life is an ever changing journey wherein you go through different phases. When you buy a term insurance plan, you assess your current financial needs, income, expenses, assets and liabilities and then make a choice. However, when there’s a change in your life, it is better to review your term insurance coverage and assess its sufficiency.
Some life events when a review of the term insurance coverage is recommended are as follows –
1. Switching jobs:
If you switch jobs and get a raise in salary, your income increases. This is the time when you can check whether your term insurance sum assured is optimal. If not, you can opt for an additional plan to enhance the sum assured as you can now afford to pay a higher premium.
2. Getting married:
When you get married, you start your family and the number of dependents increases. Moreover, you can have new goals like buying a car, moving into a bigger house, etc. As such, after marriage, a review of the existing coverage is better.
3. First child:
As your first child is born, you get an added dependent. Moreover, you need to plan for the financial future of your child, i.e., education, higher education, marriage, etc. You, thus, need to review your coverage and see if it is sufficient enough to cover the added goals.
4. The family grows even larger:
If you have more children, having a sufficient corpus to meet each of their financial needs becomes important. It also signals the need for a higher sum assured and a review becomes important.
5. New loan:
If you take on a new loan, your liabilities increase. You should assess whether your term insurance coverage is suitable to cover the increased liabilities or do you need to enhance it.
6. Closer to retirement:
As you move closer to retirement, many of your financial responsibilities might be taken care of. A review becomes important to assess if the coverage needs to be reduced or if it is sufficient to provide your spouse with an optimal financial corpus in their old age.
How to Review Your Term Insurance Policy?
To review your term insurance policy, you can –
1. Check your current income and expenses
2. Assess your current assets and liabilities
3. Check your existing coverage
Then you can calculate how much term insurance coverage is required. Deduct the existing coverage from the required amount and you will get the coverage that needs to be increased.
Reasons It Is Important to Review Your Term Insurance Coverage from Time to Time
Reviewing your term insurance coverage at regular intervals is important. Here are some reasons why –
- As your life stage changes, your financial goals and needs change. As such, you should ensure that the existing coverage aligns with your changed needs and goals.
- If you have a higher income in the later stages of life, you have a higher purchasing power. You can pay a higher premium for a higher sum assured. So, if you had opted for a limited sum assured in the past, you can review the coverage and enhance it.
- A review also helps you assess if the number of dependents has increased and if you have to take care of their needs too. If they have increased, a review helps in enhancing the coverage at the right time.
- A review ensures that your coverage is optimal to meet your family’s changing financial needs.
Conclusion
A term insurance policy is a financial security tool which gives peace of mind. Buy the policy after careful consideration of your financial needs. Avoid the common mistakes and make the right choice. Also, review your coverage with the changing phases of your life so that it remains adequate for the enhanced or reduced financial needs of your family.
FAQs
1. How can I determine the right amount of coverage for my term insurance policy?
There are various methods to determine the right amount of coverage for term insurance. Alternatively, you can use the life insurance calculator which helps you calculate the right sum assured. Just put in some simple details in the calculator and you can check the optimal sum assured in minutes.
2. What should I do if I realize I made a mistake when purchasing term insurance?
Term insurance plans provide a freelook period of 15 days2 (30 days2 for online or distant marketing modes) after buying the policy. If you think you have made a mistake, you can cancel the plan during this freelook period and get a refund of your premium subject to some charges and terms and conditions.
3. Can I change the details of my term insurance policy after purchasing it?
Changing the term, sum assured, premium paying term, etc. are not allowed after you have bought the policy.
Reference
1. https://www.livemint.com/money/personal-finance/four-methods-to-calculate-how-much-term-insurance-you-need-11605023306997.html
2. https://policyholder.gov.in/free-look-period
Information gathered from –
● https://www.moneycontrol.com/news/business/personal-finance/five-common-mistakes-to-avoid-while-buying-term-insurance-9078221.html
● https://www.financialexpress.com/money/insurance-5-mistakes-to-avoid-while-buying-term-life-insurance-2890454/
● https://disb.dc.gov/page/life-insurance-review-your-policy-secure-your-familys-future
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