Your financial planning actually begins with buying insurance. The basic rule is that your insurance should be a pure cover and you must not mix your insurance needs and your investment needs. Even when you are buying term insurance, there are a lot of things to remember. After all, this is a life-long commitment with much larger implications for you and your family. So make a list of the points to remember while buying term insurance. Here is a list of term insurance do’s and don’ts that you can use as a guide when you are buying your term insurance plan..
The earlier you buy, the better off you will be
This is quite a bit of common sense. The earlier you take term insurance, the bigger is the cover that you will get. Consequently, your premium liability each year will be much lower. You can argue that you will get a clear picture of your insurance needs only around the age of 30 but you do not have waited till then. Start off with a substantial term policy the moment you start earning and then you can add on at regular intervals.
Buy only for the tenure that the term policy is required
Buy insurance only for the time period that is relevant for you. If you buy term insurance at the age of 40 then you need not worry about continuing with your term insurance beyond the age of 60. A lot of smart salespeople will try to sell you longer term policies but when you are buying term insurance there is no point sinking costs. Stick to the time period that is relevant to you.
Fish around for competing quotes in the market to get the best deal
Don’t settle for the first insurer you come across and don’t take the "Best value for money" sales pitch. Try to get quotes from 4-5 insurers and compare the pros and cons of the various quotes. Today you have online portals for comparing. Make the best of this information and get a good deal for yourself.
Beware of the marketing claptrap (daily premium, weekly premium) etc..
Talk of a service and there is marketing involved. But you need not fall for the bait. There are insurers who will try to entice you by showing how cheap the insurance policy is in daily terms or weekly terms. Stick to your annual calculation since that is what ultimately matters. Claims like Rs.20/day premium and 99.6% claims settlement rate does not really mean anything.
Riders are add-ons so take them only if you actually need them
Every term policy comes with some add-ons in the form of riders. You have additional covers for accident, accident compensation covers, disability covers etc. Some of them may be useful and something may not add value to you. Above all, realize that all these riders come at a cost and they will increase your eventual annual premium payable on the term policy.
Make a clean and transparent disclosure of all your health related issues
Medical test is a must and you must actually insist upon the same. There are agents who will promise a policy without a medical test but that comes with its own risks at the time of settlement. Also, disclose your medical problems, whether you are diabetic, whether you are a smoker or an alcoholic etc. It may not change your premium but better to disclose and document the same.
Your term policy amount should cover liabilities and expenses
We come to the very fundamental question of how much term cover you need. There is no hard and fast formula but there are some ground rules. Your term cover should at least cover the value of your liabilities and 3 years of your income. Assume that have a home loan of Rs.40 lakhs, car loan of Rs.10 lakhs and personal loan of Rs.4 lakhs. Additionally, your gross income is Rs.1 lakh/month. So you need to cover the value of your liabilities of Rs.54 lakhs and 3 years income of Rs.36 lakhs which adds up to Rs.90 lakhs. So a term cover of Rs.1 crore should be good enough for you.
Try to consolidate your entire term insurance needs into 2 or 3 policies at the most
Don’t split your needs across too many policies. In the above case, you can split Rs.1 crore across 2 policies at the most, not beyond that. By adding more policies, you are adding to your administrative burden without any added benefits.
Read the fine print because the devil lies in the details
Every insurance policy is a contract and hence the fine print is very important. There are circumstances under which your premium can be increased and certain cases when your policy claim can be rejected. These conditions are clearly laid out in the insurance contract. Read them thoroughly before signing on the dotted line.
Get the documentations and nominations in order
Documentation may appear to be a drab process but it is a must. Keep your policies in physical and digital format for easy reference. Set reminders and ensure that premiums are paid on time. Let your spouse and children know where your policy papers are. Also, ensure that the nominee details are updated to avoid any problems in the future.
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