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6 Factors to consider before Choosing Term Insurance

Submitted by admin on November 25th, 2024

If the person survives till the term, nothing is paid back as the very purpose of the policy is to provide Life protection till the specified term by taking the risk charges (called the premium). Hence, there is no maturity benefit available in the policy.

Here are 6 Factors to consider before choosing Term Insurance

1. Identify the right Coverage needs:

Before Buying a term insurance policy, one has to calculate his or her requirements as follows.

Thus, if his family wants to spend annually Rs.1100 on mortgaged properties, loans, and other schemes to be achieved inthe  future, the Mortality Gap would be:

So, the Sum assured needs to be adequate in summing up the expenses of his or her family before the unfortunate incident

2. Choose Appropriate Tenure for the policy

The tenor of the policy should be decided depending upon his age, retirement age, and other future milestones.

How one decides on policy tenure shall primarily depends on selecting any one of the following two approaches and understanding why one need Term insurance;

• Creating an Asset to Pay off Debt/Liability

For this approach, the policy tenure shall be to cover the policyholder till age 60/65 years of age. Which means, Policy Tenure = (65years) – (the current age)

With this reason in mind, one should take a Term till the person earns a “Regular Income” and Debt and Liabilities or responsibilities towards family are aligned towards this tenure.

• Creating a Financial Estate for loved ones

For this strategy, the policy shall be to cover the policyholder till age 75 to 85 years giving rationale about Life expectancy and also resonate with the idea of buying Term for the purpose of leaving an estate for family and build financial independence for them that will allow them to continue living in the same manner, etc.

Policy term = (85years) – (the existing age)

Remember: Liability Management to become financially free

3. Know what type of Riders to take:

Riders are add-ons to the policy that can further extend your coverage. Waiver of premium on critical illness and disability can be taken along with the basic term plan.

This rider provides you a premium holiday from the date or at the diagnosis of the critical diseases or should permanent disability arises by accident. This way, Term insurance covers 3 D’s death, diseases, and disablement.

4. Calculate the premium amount:

Pricing is a key element as it needs to work out the valuation of the benefit you reap through products.

In addition, the premium amount should be cost-effective and should be sustainable over the term of the policy. This will rely upon your age, the tenure of the policy, etc. One has to remember that factor and if one’s need also retributes on income, budget and other financial liabilities while selecting the plan

5. Brand Evaluation:

This parameter assesses the financial soundness and stability of the insurance company offering the term insurance coverage.

Solvency Ratio It is a measure of finance showing the ability of an insurance firm to settle long-term liabilities. The Persistency Ratio for 13th and 61st month reveals the percentage of the policyholders which have been paying subsequent premiums for 13 months and 61 months, respectively. The Claim Settlement Ratio is defined as the ratio of claims settled by an insurance firm within the given period.

6. Claims Experience

This enables you to assess the track record of the insurance company relating to settlement of claims, the frequency with which they settle claims, the number of complaints received per 10,000 claims, etc.

The above 6 points guide will help you choose a policy that provides adequate coverage, is affordable, comes with the necessary riders, and helps make informed decisions which provides value for money and cater to individual needs.