Term insurance is one of the best ways to secure your family’s financial future. It is a long-term commitment that offers an income replacement to your family in your absence and funds their dreams and life goals.
Since it will impact the quality of life your family will enjoy when you’re not around anymore, it is an important decision to make. It is crucial that you get everything right from the start and steer clear of mistakes while buying the plan.
Let’s look at some common mistakes people make while buying term insurance, and how to avoid them.
1. Relying on thumb rules when deciding the cover amount
The most popular thumb-rule formula for determining the cover amount is ‘20X your annual income.’ This thumb rule, however, has some flaws. It takes into consideration many averages that may not be true for your specific needs.
Remember, every situation is unique and everyone has different financial goals. If you use some random thumb rule to calculate your term insurance cover amount, the chances of it being able to meet your family’s financial needs in your absence are going to be random too. Hence, do not rely on this or any other thumb rule.
The best way to find the appropriate term cover is to calculate the gap between what you’ll leave behind and what your family actually needs. How do you calculate this gap?
Calculate the amount you owe (short-term expenses, long-term financial goals, loans or other commitments)
Calculate the amount you own (savings, FDs, investments)
The difference between these two will be the financial gap you need to cover through term insurance.
Also read: Buy a life insurance policy? Do not go by the insurer's claim settlement record alone
2. Choosing the wrong claim pay-out option
You may have heard stories of lottery winners going bankrupt after losing all their money due to gambling, investing in the stock market with little knowledge, and falling for fraudulent investments.
A large term insurance claim pay-out is no different. Your family will have this huge amount of money in their bank account—possibly several lakhs or even crores. And, they might be clueless about how to handle it.
Managing a large sum of money is difficult unless you have the aptitude for it. If you don’t want your family to lose the claim money in poor investment choices and be left without financial support for their real needs, make sure you select the appropriate claim pay-out option.
Look into all the options available to customise the claim pay-out like lumpsum pay-out option, monthly income pay-out option, and lumpsum + monthly income pay-out option. Then, choose the right one based on your family’s needs and financial aptitude.
Also read: How to assess a life insurer's claim settlement ratio
3. Not opting for riders
Riders are add-ons that provide additional sums of money when a certain event occurs. A critical illness rider, for example, will offer an additional pay-out if you’re diagnosed with a serious illness listed in the policy document.
There are several types of riders available with term insurance like accidental disability rider, critical illness rider, and accidental death benefit rider.
Many people look at riders as shortcuts or quick hacks to buying a standalone insurance policy to cover a specific risk. Now, although standalone plans may be an ideal choice for many, most of us completely overlook taking them.
So, if you are purchasing a term insurance plan after months or years of delays, you can choose riders rather than waiting and not buying any standalone covers at all.
4. Selecting an insurer with the highest claim settlement ratio
The claim settlement ratio is one of the popular metrics that most insurers flaunt on their websites. However, it has certain limitations.
Firstly, it does not give any insight into the quality of the claims experience your family will get. Secondly, it is calculated across all insurance products. So, it might not accurately reflect the percentage of term insurance claims that the insurer has settled.
There is also a possibility that the insurer is effectively maintaining a high ratio by settling low-ticket size claims and not high-ticket size claims like term insurance.
So, don’t choose your insurer solely on the basis of the claim settlement ratio. A high claim settlement ratio will not improve your family’s chances of getting the claim settled and a low ratio will not reduce the chances.
5. Not filling the proposal form yourself
Insurance companies issue you the term insurance policy on the basis of the details you provide in the proposal form. Hence, it is crucial that you fill the form yourself and not depend on your agent/financial advisor or any close family member for it.
And, you should make sure you disclose all details accurately and completely in the proposal form. If you purposely hide or make incorrect declarations, and the insurer finds out, they may reject your family’s claim.
The best and only way to avoid such a situation is to fill the proposal form yourself and provide all information to the "best of your knowledge".
Remember, you buy term insurance for your family’s long-term financial security. So, in order to ensure they’re not hassled at the time of claim, make sure you don’t make these mistakes.
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