By Veronika It is essential to invest in life insurance to ensure your family’s financial well-being in your absence. Term plans have gained popularity due to their simplicity and affordability.
A regular term insurance plan is a pure life cover that pays the benefits to your nominees if an unforeseen event occurs during the policy period. Since there are no maturity benefits, a term plan comes at an affordable premium, allowing you to avail of higher coverage at a cost-effective rate.
Insurance companies offer a wide range of policies. So, along with understanding the term insurance plan meaning, you need to consider a few key factors to make the right choice. Here are five factors that you keep in mind before purchasing the policy:
- Calculate the adequate sum assured (SA)
It is possible to be attracted to a particular policy due to the lower premium. However, the SA may be insufficient to cover your family’s financial requirements in your absence. To determine the ideal SA:
- Estimate the monthly expenses and take the future inflationary increase into account
- Add your outstanding liabilities, such as home loan, car loan, or personal loan
- Deduct your liquid investments like stocks, fixed deposits, and mutual funds
- Consider any future financial requirements, such as children’s education or wedding or retirement corpus for your spouse
Based on the above calculation, you can determine the required coverage to ensure that your loved ones can meet accomplish their life goals even when you are not there with them. You need to pay more premium to get a higher SA. However, an amount of up to INR 1.5 lakh paid is eligible for term insurance tax benefit under Section 80C of the Income Tax Act, 1961.
- Determine the duration
After computing the SA, you need to ascertain the duration for which your family members require the insurance coverage. Ensure that the tenure is not less, as the coverage will discontinue before meeting the financial objectives. Conversely, if the term plan is active even after your family’s life goals are achieved, you will end up paying a higher premium.
You can calculate your net worth after reducing your debts to finalize the suitable duration. It is advisable to invest in a term plan until the age when you can clear all your liabilities through your liquid net worth. So, you can choose a tenure accordingly.
- Opt for the necessary riders
Insurers offer multiple riders (add-ons) along with their online term plans. These add-ons provide additional insurance coverage over and above the basic plan. Some commonly available add-ons include accidental disability, critical illness, income replacement, and waiver of premium. Before you add one or more of these riders, bear in mind that every additional inclusion increases the premium. Therefore, consider your family’s requirements and invest in the necessary riders for maximum coverage at the least possible cost.
- Review the claim settlement ratio
The claim settlement ratio depicts the efficiency of different insurance companies. It is the ratio between the total number of claims settled when compared to the total number of claims received by an insurer during a particular period. The higher the ratio, the greater is the insurer’s efficiency in settling claims. Opting for an online term plan from an insurer with a higher claim settlement ratio reduces the chance of rejection if your nominees need to file a claim in the future. As per Section 10(10D) of the Income Tax Act, 1961, the amount paid to your nominees qualifies for a term insurance tax benefit.
- Compare different plans offered by insurers
Most insurers offer various forms of term policies. So pick the most appropriate provider to maximize the benefits. Take your time to research the many options available online. You can evaluate different product offerings based on the inclusions, exclusions, available riders, premium, and other related parameters. Do not invest in a plan simply because it is economical. Consider other aspects and then make an informed decision.
Now that you know what to do before purchasing a term plan, follow these tips and avail of a policy as soon as possible.
Lorenzo Billie 
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