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Tata Capital > Blog > Wealth Services > Things to consider when taking term insurance policy

Wealth Services

Things to consider when taking term insurance policy

Things to consider when taking term insurance policy

Getting a term insurance plan is an excellent way to secure your family’s future upon your death. In essence, the plan assures the surviving family members a stipulated sum if the one dies before the term ends.

Today insurance companies offer various types of term insurance plans, each with terms more complex than the next. Besides, many offer online term insurance plans too. So, as someone who hasn’t spent hours researching, how do you choose the proper term insurance plan for yourself? Read on to find out.

Five things to consider when getting a term insurance policy

#1. The coverage amount

It is important to have a sufficient term insurance cover so that your family’s financial security is not compromised. Experts suggest that a term insurance cover equivalent to 10-15 times of your annual income is sufficient to provide a safe future for your family.

To make a decision on the amount of cover you need, you must assess and consider aspects such as: your age, financial responsibilities, family’s future financial requirement, basic expenses based on your lifestyle habit, loans you are servicing today, inflation and rising costs.

Other calculation methods suggest factoring your family’s monthly expenses, liabilities and bills, assets, your family’s life goals and even your spouse’s post-retirement corpus before arriving at a number.

#2. Tenure

Next, you must select the appropriate tenure for the insurance. If you choose a shorter tenure, you risk losing the cover before fulfilling your financial obligations. But if you choose an excessively long one, you most likely will have to arrange funds for a higher premium.

A good rule of thumb when selecting tenure is to determine the time it will take for your liquid net worth to be greater than your term life insurance.

Remember, you will need coverage for this period. Post that, your assets can provide for your family.

Ideally, a term plan should cover you till you intend to work.

#3. Pay-out options

Most term insurance plans allow you to select between monthly and lump sum pay-out options.  You should choose the pay-out option as per your requirement and feasibility as the premium also varies depending upon the pay-out option you choose.

#4.  Select the right insurer

You don’t want to get term insurance from a provider who has a questionable reputation but charges a low premium for your term. You do not want to avail of services from providers with a low claim settlement ratio. In either case, you aren’t guaranteed proper and timely payouts during times of need.

When deciding on your insurer, do some basic checks. Check for their claim settlement ratio, solvency ratio, financial background and market reputation.

1. Claim Settlement Ratio – It is advisable to select an insurance company that has a high claim settlement ratio

2. Solvency Ratio – Selecting an insurer with higher solvency ratio is advisable as it indicates financial strength.

3. Financial Background – Find out the financial background to ensure the insurer has the ability to take care of it short-term and long-term liabilities in case of a crisis.

4. Market reputation – Find out the market reputation of the insurer to know more about aspects such as the number of customer complaints and grievance ratio.

#5. Choose your add-ons wisely

There are four major riders that are available: 

●        Additional cover for death due to accident:

●        Cover for critical illness:

●        Waiver of premium on disability:

●        Waiver of premium on critical illness:

Of the four riders, two riders, i.e. waiver of premium on disability and waiver of premium on critical illness, come at a low premium. The rider for critical illness cover is the most expensive.

Term life insurance is a long term contract between you and your insurer, and it will benefit your family when you are not there. It is in your best interest to choose the right plan for your family by considering all the five factors discussed in the article. 

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