You have heard of your parents suggesting saving for emergencies as soon as you start earning. Saving for emergencies is important but protecting your loved ones financially if the uneventful happens should be a priority. Term Insurance Policy is an effective way of securing your family financially. Choosing the right term insurance plan is imperative to avoid gaps that can put your family in a tough financial situation. Consider the factors mentioned in this article before you buy a term plan.
Points To Consider Before Buying A Term Insurance Policy
Money cannot compensate for one’s life. But it can definitely secure your family financially in your absence. Buying the right term insurance policy is the key to providing the intended financial stability for your family. Consider the following factors before investing in a term plan.
Lifestage and Dependents
Financial goals vary with the life stage you are in. You will have to fulfil more responsibilities as you enter different life stages like marriage, becoming a parent, etc. Also, if you are the sole earning member, consider the number of dependents and their requirements before buying a term plan.
Assess your lifestyle honestly before investing in a term plan. The main components of your lifestyle are spending habits and standard of living. It is essential to be realistic while assessing this so that your family can maintain the same lifestyle even in your absence.
Your income is what determines the coverage. It is suggested that the sum assured should be 10 to 15 times your annual income. Having said this, you should ensure that the premium rates align with your affordability. You may have financial commitments that take away a portion of your income. You should analyse if the residual income will be able to provide for the premium payments.
Account Your Liabilities
One of the purposes of investing in a term insurance policy is not to pass on the burden of your liabilities to your family. Consider all the existing liabilities, such as home loans, personal loans, and business loans while calculating the sum assured for the policy.
Riders For Additional Benefit
You can customise the policy for additional term insurance benefits by adding riders. Riders are add-ons that can be added to the base policy for enhanced coverage by paying an extra premium. Some of the standard riders insurance companies provide are:
- Critical Illness Rider: Under this rider, the company provides a lumpsum amount for the treatment of critical illnesses permitted under the plan.
- Accidental Death and Disability Rider: If the policyholder dies in an accident, the nominee gets an additional payout along with the sum assured. In case of permanent disability of the policyholder due to an accident, the premiums for the rest of the plan’s tenure will be waived but the life cover will continue.
Tenure of the Policy
If you are planning for a retirement corpus, then you should consider a term that aligns with your retirement age. The maturity of the plan should coincide with your retirement. In this case, the tenure should ideally be the retirement age minus the current age.
The inflation rate is another crucial factor to consider before buying a term plan. Money value keeps decreasing as the inflation rate increases. To make up for this, some insurance companies provide plans where the coverage increases by 5 to 10% every year.
Claim Settlement Ratio
The whole process of choosing the right term plan will be futile if you have not considered the claim settlement ratio. The claim settlement ratio defines the credibility of an insurance company. It shows how many death claims are settled by paying the death benefits to the beneficiaries. The whole purpose of providing financial security to your family fails if the death claim is rejected. Look for an insurance company with a claim settlement ratio between 95% to 98% for every 100 claims annually.
Compare The Costs and Benefits
Conduct thorough research on the costs and benefits of different insurance companies. Do not get lured by a low-cost plan without weighing the pros and cons.
Providing financial security for your family in your absence is the best way to protect their future. While doing so, an informed decision will go a long way. Invest in a term insurance policy to provide financial stability for your family. But before that, consider the factors that fulfil the purpose. You should also consider your ability to pay for the investment without financially burdening yourself in the quest to financially secure your family.