6 Misconceptions about Term Insurance you may not believe!
You may not trust what you are about to read. Some of it could shake some of your core understandings related to Term Insurance.
Given how important term insurance is, for your family’s financial future, you cannot really afford to go wrong. So without much ado, here are 6 such very prominent misconceptions that might lead you to make the wrong term insurance decision - and how you can avoid that!
Misconception 1: I should get a policy as soon as I can in life, so I get to keep the premium amounts low
Truth: The purpose of a term cover is to protect the financial interests of your dependents. The idea is that in case you pass away early - your family should not be burdened by any liabilities or monetary responsibilities that you leave. Having established that, if you’re unmarried and your parents are comfortable and financially independent - you don’t really need a term insurance policy today.
It’s like a bald guy buying a comb, just because it’s available for cheap. What you should instead do is plan to start investing in a policy, as soon as you have dependents.
Misconception 2: There are many types of death that are not covered under term insurance. I’ll need to ask my agent for a list.
Truth: We have gone through all available term insurance policies in detail, and this is not true. With the single exception of suicide (within one year of taking the policy), there are no types of death that a term insurance policy won’t cover. Further, you should know that it is the insurance company’s responsibility to list any exceptions in the proposal document - and unless it is explicitly mentioned, you do not have to assume any exceptions to this rule.
Note: There might be additional exclusions to Riders that you choose. Be careful to understand these exclusions, so you're not taken by surprise.
Misconception 3: Riders are fantastic because they’re easy to pick and way cheaper than full covers
Truth: Riders are short-cuts designed for those who don’t want to spend time and effort getting a comprehensive cover. They aren’t exactly ‘way cheaper’ - maybe just a little; but, come with several limitations that make them a lazy investment compared to buying specialized covers available in both cases. The exception is the riders for Waiver of Premium in Critical Illness or Waiver of Premium in Disability - which is highly recommended and very useful.
Note: - For Critical Illness coverage, it is 'ideal' to buy a separate cover. But - such covers can get very expensive. As the next best alternative, you should opt for a cost-effective - Comprehensive Critical Illness Rider (Not accelerated) along with your Term Insurance policy.
Misconception 4: I’ve picked the insurer with the best claim settlement ratio. This guarantees that my family gets the claim amount!
Truth: The Claim Settlement Ratio only gives the percentage of the number of claims settled to the total number of claims the company received in a given financial year. It doesn’t speak anything about the quality of the claims experience or the percentage value of claims that are settled by the insurer. Often, this ratio is calculated across many products and might not accurately reflect the fraction of term insurance claims paid alone. Don’t depend on just this ratio to make your decision. Only ensuring you have made the correct disclosures and declarations while buying the policy guarantee that your claim will get paid.
Misconception 5: I’ll pick a cover amount that’s 20x my current annual salary. I should be sorted.
Truth: This is a thumb rule, and like all other thumb rules, has limitations. The term insurance cover amount that your family needs depends entirely on your lifestyle, commitments, and future plans. You will need to make a detailed list of all your short-term and long-term plans that need expenditure, and all the investments and savings you have (with risk factored in), and decide on this amount. A detailed calculation with illustrated examples for this are available in our recently launched eBook - The Ridiculously Simple Guide to Term Insurance - that you can download for free here. Once you follow all instructions, you can just not go wrong!
Misconception 6: My wife will get all my term insurance claim amount, directly, and she can decide if she wants to pay the creditors
Truth: According to the law, your creditors have the first right to any term insurance claim amount - even before your wife and children get it. To counter this, you can take the Term insurance policy under the Married Women’s Property Act (MWP) by signing an extra addendum while taking the policy. This act ensures that your wife (and no one else), gets the claim amount directly, thereby ensuring their financial security as a top priority.
Now that you have this data, you will be better equipped to make a well-informed decision about your insurance purchase, and never have to regret it.
There are many more such interesting myths and facts discussed in our eBook - The Ridiculously Simple Guide to Term Insurance.
- Buy a policy, only once you have financial dependents, and need it.
- Term insurance covers all types of death, except suicide within the first year. Raho Beshak!
- Skip riders and take comprehensive covers. Except Waiver of Premium in Critical Illness and Waiver of Premium in Disability - these are a recommended riders.
- Look beyond the Claim Settlement Ratio - and understand how an insurer's claims experience is
- 20x cover amount might not work for everyone. Do a proper calculation.
- If married (and male), take the policy under MWP, to protect your wife and children's claim.
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