5 Things to Know Before Buying a Term Life Insurance Plan

Buying a term life insurance policy is one of the best financial decisions you can make to protect your family and loved ones in case of an unforeseen event. However, before making this commitment, it’s important to understand the key aspects that can affect your coverage, premiums, and the overall benefits you receive.

Here are the 5 most important things to know before buying a term life insurance plan:

1. Assess the Right Coverage Amount (Sum Assured)

The first step in purchasing a term insurance plan is determining the appropriate sum assured (coverage amount). The sum assured is the amount your beneficiaries will receive in the event of your untimely death, and it should be high enough to replace your income and provide financial support for your dependents.

How Much Coverage Do You Need?

• A good rule of thumb is to have 10 to 15 times your annual income as the sum assured. For example, if you earn ₹10 lakh annually, you should ideally opt for a sum assured of ₹1 crore to ₹1.5 crore.

• Consider factors like existing liabilities (loans, mortgages), future financial needs (children’s education, retirement savings), and living expenses when deciding on the coverage amount.

• Use a term insurance calculator available on most insurance websites to estimate the coverage you need based on your lifestyle and goals.

Important Note:

A higher sum assured will result in a higher premium, but it provides more comprehensive financial protection for your family.

2. Choose the Right Policy Term

The policy term refers to the duration for which the term insurance policy will provide coverage. A longer policy term provides protection for a longer period, but the premium will also be higher. Choosing the right policy term is crucial for adequate coverage at an affordable premium.

Factors to Consider When Choosing a Policy Term:

• Age and Life Stage: If you are in your early 30s with young children, opting for a longer policy term (20 to 30 years) is advisable to ensure your family’s financial security until they are financially independent.

• Retirement Planning: Ideally, you should have coverage until your retirement age or until your children are financially self-sufficient.

• Affordability: Longer policy terms tend to have slightly higher premiums, so make sure it fits your budget.

Policy Term Example:

If you're 30 years old and looking for coverage until retirement, a 20 to 30-year policy term could be appropriate. On the other hand, if you're nearing retirement, a 10 to 15-year term may suffice.

3. Understand the Premium Structure and Payment Mode

The premium is the amount you pay for your term insurance coverage, either annually, semi-annually, quarterly, or monthly. It’s important to understand how the premiums will be charged and how the payment schedule affects your finances.

Key Points to Consider:

• Premium Frequency: Many people prefer annual payments because they often come with a discount compared to paying quarterly or monthly.

• Increasing Premium: Some plans have increasing premiums over time (due to age-related risk). Check if your chosen plan has this feature and if it fits within your budget.

• Level Premium: Many insurers offer level premiums where the premium remains the same for the entire policy term. This is ideal if you want predictable costs over the years.

• Premium Payment Terms: You can choose between paying premiums for the entire policy term (e.g., 20 years) or for a limited time (e.g., 5 years), depending on the plan and your financial situation.

Tip:

Compare premiums across different insurers and consider online plans, which tend to be more affordable than traditional plans due to lower administrative costs.

4. Review the Exclusions in the Policy

While term life insurance is one of the simplest types of coverage, it's important to understand the exclusions—situations where the insurer will not pay out the death benefit. These exclusions can vary from one insurer to another, but here are some common ones to watch out for:

Common Exclusions:

• Suicide: Most policies have a suicide clause, which states that the death benefit will not be paid if the policyholder commits suicide within the first 12 months of purchasing the policy.

• Death Due to Illegal Activities: If the policyholder dies while involved in illegal activities, the death benefit may not be paid.

• Death Due to Self-Inflicted Injury: Deaths due to intentional self-harm or injuries caused in the course of dangerous activities may be excluded.

• Risky Hobbies or Occupations: Certain high-risk activities like skydiving, bungee jumping, or working in dangerous occupations may not be covered.

• Pre-existing Conditions: Some policies have waiting periods or exclusions related to pre-existing medical conditions. Make sure to read the fine print to understand these details.

Tip:

Always check the policy brochure for a list of exclusions to ensure that your specific circumstances are covered.

5. Riders and Additional Benefits You Can Add

While a term life insurance policy provides basic coverage, many insurers offer the option to add riders (additional benefits) that can enhance your policy’s protection. These riders generally come at an extra cost but can provide more comprehensive coverage in certain situations.

Popular Riders to Consider:

• Critical Illness Rider: Provides a lump sum amount if you're diagnosed with a critical illness such as cancer, heart attack, kidney failure, etc.

• Accidental Death Benefit Rider: Pays an additional amount if the death occurs due to an accident. This can be extremely helpful in case of unforeseen accidents.

• Waiver of Premium Rider: If the policyholder is diagnosed with a critical illness or suffers a disability, this rider waives off future premiums while keeping the policy active.

• Income Benefit Rider: In case of the policyholder’s death, this rider ensures that the nominee receives a fixed monthly income instead of a lump sum amount, helping them manage their expenses better.

Tip:

Carefully evaluate which riders are necessary for your financial situation. Adding riders may increase your premium, but it can offer extra protection, especially if you or your family are at a higher risk of health issues or accidents.

Conclusion

Before buying a term life insurance plan, it’s essential to make informed decisions based on your unique financial situation, goals, and the needs of your loved ones. Here’s a quick summary of what to keep in mind:

1. Coverage Amount: Make sure the sum assured is enough to replace your income and cover your family’s future financial needs.

2. Policy Term: Choose a policy term that ensures coverage until your dependents are financially independent.

3. Premium Structure: Understand how premiums are charged and ensure that the premium payments fit within your budget.

4. Exclusions: Familiarize yourself with the policy’s exclusions to avoid any surprises later.

5. Riders: Consider adding riders for additional coverage, such as critical illness, accidental death, or waiver of premium.

By taking these factors into account, you can choose the best term insurance policy that provides maximum protection for your family at an affordable cost. Always read the fine print, compare different policies, and select the one that aligns best with your long-term financial goals.